Option Investor

Daily Newsletter, Saturday, 2/6/2016

Table of Contents

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

Market Wrap

Techs Take a Beating

by Jim Brown

Click here to email Jim Brown

Weak earnings guidance from Linkedin and weak earnings from Tableau Software knocked the Nasdaq to the lowest close since October 2014.

Market Statistics

Friday Statistics

The Nasdaq rout was just that, a monster rout that crushed dozens of big names. The Nasdaq closed at 4,363 and the lowest level since October 20th, 2014. The Nasdaq is suddenly down -16.3% from its highs and nearing the bear market level at 4,175. The tech bounce out of the January lows has been erased. The carnage was unbelievable.

These are just some of the tech stocks that were crushed on Friday. These are losses for Friday only!

The Friday carnage was caused by Linkedin (LNKD) and Tableau Software (DATA) but the overall tech decline had been in progress all week. The Nasdaq stalled at just over 4,600 on Monday, which was a two week high and then dropped -273 points starting on Tuesday. The Friday close at 4,363 is only slightly above critical support at 4,330. A breakdown there targets clustered support in the 3900-4050 range and that would be a bear market level.

Linkedin reported earnings and revenue that beat estimates but gave weaker than expected guidance. A lot weaker! The company reported earnings of 94 cents on revenue of $862 million. Analysts were expecting 78 cents on $858 million in revenue.

For the current quarter, the company guided to earnings of 55 cents and revenue of $820 million. Analysts were expecting 75 cents and revenue of $858.3 million. The CEO said they were going to stop throwing money at the wall to see what would stick and instead focus on a limited number of high value, high impact initiatives. While that is a good plan long term the sharp drop in guidance crushed their stock with a -$44, -84% drop. I am sure if the CEO could relive Thursday's earnings call he would do it a lot different. He erased more than $10 billion in market cap in one conference call.

Tableau Software (DATA) reported earnings of 33 cents that easily beat estimates for 16 cents. Revenue of $202.8 million also beat estimates for $201.2 million. The company added 3,600 new customers to a total of 39,000. Unfortunately, management guided for revenue of $160-$165 million for the current quarter and well below estimates for $179.5 million. They also see a loss for the quarter of 8-12 cents per share. They also cut full year revenue estimates from $845-$865 million to $830-$850 million and well below analyst expectations for $871.5 million. Full year earnings were now expected to be in the range of 22-35 cents and analysts were looking for 62 cents. The company said this would be "another investment year" and would lead to lower earnings. It also led to a lot lower stock price. Shares fell -$49.44 or -40.4%.

The problem with the weak guidance from Tableau is that it created growth concerns for the rest of the cloud software sector. Even big companies like Adobe, SalesForce.com and Workday were crushed as investors raced to exit the sector before somebody else warned and suffered a 40% drop in the stock price. Normal investors do not get that concerned about a 4% drop but seeing a tech stock or in this case a couple of tech stocks get knocked for a 40% loss it sent them fleeing for the exit on anything tech related.

Tableau reported license revenue that missed estimates for the first time since their 2013 IPO. Growth of 31% was well below the 75% growth in the year ago quarter and 75% and 60% in the prior quarters this year. The CFO said customers had slowed spending, particularly in North America. This comment worried analysts because it could mean enterprise spending overall in every sector was slowing. This also caused the rush out of anything technology oriented on worries other companies could also report slowing sales.

It was a bad week for earnings. Also on Friday aerospace and defense supplier Esterline Technologies (ESL) reported earnings of 62 cents where analysts were expecting $1 per share. Revenue of $441.5 million missed estimates for $476.6 million. The company said the lower revenue was due to lower end-market demand and the strong dollar. Shares declined -30% on the earnings.

The company also announced an investigation for possible SEC violations by Johnson & Weaver. This is a typical "ambulance chaser" case whenever shares drop sharply and will not have any bearing on ESL in the end.

Ultimate Software (ULTI) reported earnings on Tuesday that beat the street but they were crushed on Friday as part of the tech bloodbath. They reported earnings of 83 cents that beat estimates for 73 cents. Shares rallied $15 on the news and held the gains for two days. On Friday the stock collapsed -$18.50 because of the Tableau Software disaster. This kind of guilt by association was rampant on the Nasdaq on Friday.

Athenahealth (ATHN) killed estimates when they reported earnings of 45 cents compared to estimates for 16 cents. Revenue of $257.5 million rose +21% but just missed estimates for $257.7 million. The company added 13,067 health providers to their network. They now boast more than 75,000 providers and 38 million patients for their Internet based service. They guided for full year earnings of $1.65-$1.85 on revenue of $1.09 to $1.12 billion.

Shares declined -$18 on Friday because revenue grew +20.8% but earnings declined -13.6%. Direct expenses rose +28% and selling and marketing costs rose +30%. I suspect the majority of the stock loss was Nasdaq weakness related because shares only declined -$2 in the afterhours session on Thursday after reporting results.

Shares have very strong support at $112-$115 and I would be a buyer in that range.

Palo Alto Networks (PANW) dropped -$18 on no news to break below strong support at $140. This was another casualty of the Nasdaq crash. It was a tech stock and suddenly everybody wanted out. If we see a Nasdaq bounce next week I would expect PANW to be a leader out of the depression.

There was only one economic report that mattered on Friday. That was the Nonfarm Payrolls and they showed a gain of +151,000 jobs. That was well below the initially reported December gain at 292,000 and well below estimates for January that had shrunk from 220,000 to 190,000 over the last two weeks. The December number was revised lower to 262,000. November was revised up from 252,000 to 280,000.

The unemployment rate ticked down from 5.0% to 4.9% because the BLS updated their population estimates to show a higher population. They said the civilian population rose +265,000, civilian labor force by +218,000, employment by +206,000 and unemployment by +12,000. The number of people not in the labor force increased by +47,000. In the annual benchmark revisions done in January nearly 100,000 jobs were removed from the final totals.

Accounting for the sharp drop in January payrolls was the seasonal shift away from temporary holiday hiring, which decreased -45,000. Also, a factor was a drop of -30,000 in construction worker hiring from 48,000 in December to 18,000 in January. Manufacturing helped to offset some of the declines with a very strong +29,000 jobs. Retailers hired an unexpectedly high 58,000.

Of the 151,000 new jobs, 102,000 were in the minimum wage category. The broader U6 category of unemployment was flat at 9.9%.

What riled the market was not the miss in the headline number but the sharp spike of +0.5% in average hourly wages, up +2.5% from January 2015. While this would appear to be a sudden jump in compensation that could put the Fed back in rate hike mode, it was simply the result of multiple states and cities raising the minimum wage effective January 1st. I guarantee you raising the minimum wage a buck or two is not going to suddenly spike inflation. Anyone working at a minimum wage and seeing it rise $1 an hour is not going to be bidding up prices at the local grocery store. That $30 a week is going into their gas tank and probably an extra order of fries for lunch. The consternation over the sudden jump in wages was definitely misplaced.

The calendar for next week is very light with the exception of Yellen's testimony in Washington on Wed/Thr and the Fed's Williams speaking on "The Health of the Economy" on Wednesday. That should be an interesting speech.

Much ado has been made about the Fed decisions being "dependent on the data" when in reality it appears they have been making decisions independent of the data. It will be interesting to see how Williams will get around that inconvenient truth.

The Yellen testimonies will boil down to "the economy has weakened but we expect it to pass. We are monitoring it closely." I suspect she may try to put a bullish spin on it to some extent to try and talk the equity markets back off the cliff.

No forward splits were announced last week. Top Ships (TOPS) announced a 1:10 reverse split to keep from being delisted. They split 1:7 in April 2014 so their track record is not very good. Hormel (HRL) splits 2:1 on Tuesday.

For the full split calendar click here.

The earnings calendar is devoid of a bunch of market moving announcements. Disney, a Dow component, could be a highlight on Tuesday along with Cisco Systems on Wednesday. Tesla could garner some excitement after a drop to a two-year low at $162 on Friday.

FactSet reported on Friday that overall earnings had actually improved. Blended earnings for Q4 have now declined -3.8% compared to -5.8% the prior week. To date 70% of S&P companies have beaten earnings estimates and 48% have beaten on revenue. Revenue has declined -3.4%. So far, 57 companies have issued negative guidance and 14 companies issued positive guidance. Next week 65 S&P companies will report earnings.

FactSet is not expecting positive earnings growth until Q3.

Oil prices declined to $31 at the close despite the scheduled meeting on Sunday between the Venezuelan and Saudi Arabian oil ministers. The Venezuelan minister had been on a whirlwind tour last week pleading for a production cut with anybody that would listen. He met on Friday with the Qatari oil minister, who happens to be the President of OPEC this year. That is a rotating presidency with each country in OPEC being president for a year.

The Venezuelan minister is facing a tough battle. His country is rapidly going broke with inflation expected to be 740% this year and no goods to buy or sell other than oil. The country has not been able to produce its quota for years as a result of the failed Hugo Chavez socialism project and the country is very close to complete failure. Venezuela needs to convince everyone else to cut production but you can bet Venezuela will not cut a single barrel and justify it because they are not producing their current quota.

While the Venezuelan minister has been country hopping to try and generate a call for an emergency production meeting, not a single Persian Gulf member of OPEC, including Saudi Arabia has publically backed a meeting. Nobody will do anything without Saudi Arabia on board and the Venezuelan minister meets with Ali al-Naimi in Saudi Arabia on Sunday. The odds are nearly 100% that no production meeting will be scheduled. However, you never know. Eulogio del Pino may have a pocket full of promises from all those OPEC states saying they will meet if Saudi Arabia agrees. I find that extremely unlikely but it is possible.

U.S. crude inventories rose 7.8 million barrels last week to more than 502 million and a new record high. With six more weeks of the inventory build cycle ahead we are likely to move much higher.

The price of oil is causing severe pain to producers. Conoco (COP) cut its dividend by 67% last week even after saying in months past that would be a last resort. Linn Energy (LINN) warned on Thursday it had run out of money and credit and was "exploring strategic alternatives" to shore up its balance sheet. As recently as November Linn had exchanged $2 billion in unsecured debt for $1 billion in secured debt as it tried to reduce its overall debt load, which is currently $3.6 billion. Linn made the "throwing in the towel" announcement after it drew down the remaining $919 million in its credit facility. I am sure that bank will be firing somebody soon.

Chesapeake (CHK) recently said it had run out of options and had hired Evercore Partners to help it address its $11.6 billion in debt.

The lack of cash at $30 oil is strangling producers. Baker Hughes reported on Friday that active rigs dropped a whopping -48 to 571 total rigs. That is down -1,361 from the peak of 1,931 in 2014. Oil rigs fell -31 to 467 and gas rigs declined -17 to 104. Those are both 18-year lows.

If we wake up on Monday and Saudi Arabia agrees to a production cut meeting the price of oil could be $40-$50 within weeks. If instead Saudi says no to the emergency production meeting and announces that fact, then we could see $25 oil before the week is out. Saudi knows this and they do not want to see $25 oil so there may be some headline spam to suggest the possibility of a future meeting just to keep the prices from crashing again. The entire rebound in oil prices over the last three weeks has been the result of countries trying to talk up a meeting in the press in order to lift prices.


We may have reached the fork in the road. With the Nasdaq closing at 15-month lows we have the perfect setup for a continued crash to bear market levels at 4,175. However, as I pointed out in the charts above, many stocks crashed with the market rather than on individual fundamentals. This makes them extremely oversold and without a good reason. They have become bait for dip buyers. Whether investors will attempt to catch these falling knives or wait until a bottom appears is of course unknown.

Despite the carnage in the Nasdaq the Biotech Index ($BTK) only lost -57 points for the day but it was down -155 for the week. Maybe it has reached a point where sellers are running out of stock. The biotech sector has been a major drag on the Nasdaq over the last month.

While the Nasdaq closed at a new low the intraday dip in January declined to 4,313 and about 50 points lower than Friday's close at 4,363. That intraday low would be the first line of defense with the 4,292 low in August as backup support. If we bust through those levels it could be a long drop to 4,000.

Investor sentiment has soured. The rally from the January dip now looks like a typical correction rebound and now that has failed. Typically, we would go lower from here although it is possible we could see a double bottom form. However, with sentiment now severely negative it could be at a lower low.

Some analysts are looking for a flush early next week and then a late week rebound. Markets rarely bottom on Fridays and closing on the lows will trigger some margin selling on Monday. If Monday is another decline then more margin selling will follow on Tuesday, etc, until somebody buys the dip.

On the plus side with the earnings cycle winding down the major companies are now free to buy their stock back again. They are prevented from doing that prior to earnings. At these levels, those companies with big buyback programs should be backing up the truck.

If you ask your 5th grader to look at the chart below and tell you which way the Nasdaq is going, they are going to say down. As older and more intelligent adults, we get confused by what is happening in the headlines and by what we want to see and ignore what is really happening. When in doubt, ask a 5th grader. They have no preconceived bias.

The S&P appears to be targeting 1,820 again. If you look at the August dip, rebound, dip and rally, that could be what we are setting up for this time. I doubt the 1,867 bottom from August is going to hold given the severity of the Nasdaq drop. A failure there targets 1,820 and that is far enough down that sellers should lose some intensity before we get there. Given the three prior tests of the 1,820 level most traders would be conditioned to buy that level. Whether that is the right move remains to be seen.

In the weekly and monthly charts below the outlook is bearish. Sometimes we get so caught up in the day to day market movement that we do not look at the longer term direction.

In the monthly chart, the 10-month average in blue has crossed below the 21 months in red. This is only the third time in 21 years that has happened and you can see the results. This is a super slow indicator but it works well for IRAs and long-term investments. You will not get in/out at the exact top and bottom of a move but I do not think anyone would argue with the long-term results.

The Dow was dragged down by Visa, J&J, McDonalds, Apple, Home Depot, Nike and United Health. None of them had any material news. What did they have in common? With the exception of Unitedhealth they are consumer stocks and declining job numbers suggests retail sales could turn sluggish. I am guessing Unitedhealth was down on the verbal beating the health care sector took from the Democratic debate on Thursday evening. I would bet that a weaker than expected jobs report did not suddenly create a consumer recession.

The Dow has decent support at 16,000 and again at 15,855. If those level break the August flash crash low at 15,370 would be the next target. However, the Dow chart is significantly stronger than the Nasdaq. The Dow is still in a minor uptrend from the January 20th lows.

The Russell 2000 broke out of its tight trading range of the last two weeks and could now be headed for a retest of the 958 low from January. I was somewhat encouraged over the last two weeks by the lack of weakness in the Russell. Every dip to the bottom of the range was bought and it appeared fund managers were nibbling. If the Russell declines from here it could quickly worsen sentiment and another flush could quickly retest the lows.

It was just a week ago that the Dow gained +397 points on Friday. Despite that gain it only gave back -1.6% this week compared to a -4.8% decline on the Russell and a -5.4% decline on the Nasdaq.

I mentioned last weekend that a lot of analysts were expecting a retest of the January lows once the earnings cycle was over. The majority of the big names have reported and most of what is left is the stragglers. We know how the quarter will end up with negative earnings of around -5%. The individual earnings disasters on Friday may have triggered that February retest. Time will tell.

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.

subscribe now

Random Thoughts

Citi helpd spread some doom and gloom on Friday when strategist Jonathan Stubbs said the global economy seems trapped in a "death spiral" that could lead to further weakness in oil prices, recession and a serious equity bear market. He was definitely going for the scary headlines in this note.

He said the stronger dollar, weaker oil/commodity prices, weaker world trade, petrodollar liquidity, weaker emerging markets and global growth, etc, could lead to "Oilmageddon," a significant and "synchronized" global recession and modern-day bear market.

He did say that some analysts at Citi predicted the dollar would weaken in 2016 and oil prices would likely bottom. "The death spiral is in nobody's interest. Rational behavior, most likely will prevail."

So, release the report with scary headlines and then end it with "rational behavior, most likely will prevail." Sounds like somebody was starved for attention and wanted his 15 min of fame.

He did have one point right. The lack of a world economy floating on petrodollars is a very scary place. When oil was $100 every producing country was flush with dollars and they spent that money all around the world. This kept the global economy lubricated. With global producers now living on 30% of what they received two years ago, an entirely new dynamic is in place. These countries are broke and they are being forced to cancel/remove subsidies that kept their populations happy.

Gasoline for 20 cents a gallon is now 2-3 times that. Utility subsidies that kept electricity, gas and water flowing to poor citizens have been cancelled or reduced significantly. Government wages are being slashed, jobs cut, infrastructure projects cancelled, road maintenance postponed, etc. All of this is due to the 70% decline in oil prices. Hundreds of millions of people are living in countries where the current revenue can no longer support them in the manner in which they were accustomed.

It is no surprise that the global economy is slowing. There is a shortage of petrodollars to keep it lubricated.

This is not likely to change in the near future. Oil prices will rise in Q3/Q4 but it could be years before they return to a level where governments will be able to subsidize/support the population and economic activity like they did in the past.

Investor sentiment for the week ended on Wednesday saw bullish and bearish sentiment decline while neutral sentiment rose. Wednesday's market was positive but it was down from the Monday high. Investors are definitely confused but 72% are not bullish.

Verizon (VZ) confirmed on Friday it was considering a bid for Yahoo. Verizon acquired AOL in June. CEO Lowell McAdam said their strategy was to have great connectivity, own platforms that drive traffic to its network and own content that supports its ecosystem. McAdam said "We have to understand the trends at Yahoo but at the right price, I think marrying up some of their assets with AOL and the leadership would be good."

Mark Cuban is a big investor in Netflix (NFLX). He recently bought more shares when the stock began to drop sharply. On Friday he posted on Cyber Dust, his favorite social media platform that he was not selling his shares but he had bought puts to cover his entire position. That is a lot of puts! He already had a "large" position and added 50,000 shares in October 2014 and then added more in late 2015 and bought more in January. Nobody knows exactly how many shares he has but it is a lot. At $5 for the April $75 puts that would be a big insurance payment.

Brokers like Ameritrade claim liquidity is leaving the market. Baby Boomers are moving to cash and bonds for safety after more than a year of volatility and no gains. Millennials are 55% in cash and most of their equity investments are in IRAs or 401Ks and are not traded. High frequency trading has averaged 49% of the volume for the last three months. That means of the 9.3 billion shares traded on Friday 4.55 billion shares were high frequency churn. They never hold anything for more than a few seconds to a few minutes and they can stop trading in an instant. That is really scary except that highly directional market are highly profitable for them so they are not likely to go away. In the real flash crash from a couple years ago many did halt trading for a few minutes because the bid/ask spreads and lack of quotes put the programs into panic mode.

We hear every day that low oil prices are good for the economy. U.S. consumers are saving billions from low gasoline prices. We also hear that low interest rates are great for the economy because it reduces borrowing costs for consumers and businesses. We have both low oil prices and low interest rates but the economy grew at only +0.7% in Q4 and jobs appear to be slowing. Why? Enquiring minds want to know. You know the Fed is going crazy trying to figure out the answer.

Occidental Petroleum (OXY) reported last week that the all in cost for oil production in the Permian Basin in Texas was $22-$23 a barrel. Producers in that area can still make a few bucks on new production. However, that is the only area of the country that is profitable. Wood Mackenzie said 3.4 mbpd of global production was cash negative at $35 per Brent barrel. That means they actually lose money on every barrel produced.

Wood Mackenzie said not to expect many producers to actually shut in production. After factoring in the cost to shut off production, the cost to restart, the lost cash flow, negative or not and the danger to future production, prices would have to go a lot lower before producers would bite the bullet and shutdown the wells. When a well is shutdown, things happen underground. Producers spend millions of dollars to get oil to flow towards the pipe so it can be extracted. As long as that oil is flowing, it remains liquid. If production stops that oil can thicken and clog up the pores in the rock and when production is restarted, it may only be a fraction of what it was when it was halted. Wells need to continue running even if they are turned down to a very low rate just to keep the flows moving.

T. Boone Pickens has capitulated. He said on Friday he has closed all of his energy positions and he will not get back in until inventories begin to decline. That is normally in late April and early May. He started reducing position late last year, some of which he had held for three years. He thought prices had reached a bottom in August when they rebounded for two months. He added new positions in Q3 and then closed those in Q4 as well.

He believes we saw the lows for WTI in January but wants to wait until inventories begin to decline before rebuilding his portfolio. He warned that we could still see some extreme volatility in the weeks ahead.

From 1,000 to as many as 1,500 private jets are expected to deliver passengers to the Super Bowl causing serious congestion in the various airports around the stadium. Fortunately, the game is in Santa Clara, about 45 miles south of San Francisco. There are plenty of local airports to park the planes.

Private jet flyers are expected to spend between $75 - $85 million just getting to the game. FlexJet has as many as 100 flights coming to the game. FlexJet is offering regional food in flight from elk and other big game meats for Denver flights and ribs, pulled pork and other barbeque from the Carolinas.

NetJet is holding a special "Super Bowl BBQ" for its customers and this year will have entertainment from the band Maroon 5. Wheels Up is hosting a private party with tons of celebrities and Grateful Dead's Bob Weir is the rumored entertainment.

PrivateFly, a private charter company said a Gulfstream G550 from New York will cost $85,000 or about $6,000 a person. From Denver a 13-seat Falcon 2000 costs $35,000. BlackJet is selling single seats on private jets for $6,200 from New York of $3,700 from Chicago.

The average Super Bowl ticket was selling for $4,750 on Friday with the most expensive at $23,400 for a box.

If you want to know how the 1% lives the above is a good description. The rest of us fly coach and watch the game on TV.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"A prudent person forsees the danger ahead and takes precautions. The simpleton goes blindly on and suffers the consequences."

Proverbs 27:12


Index Wrap

Another Weak Start To A New Month

by Keene Little

Click here to email Keene Little
The bounce into the end of January was not followed by a bullish first week for February. Instead we had a down week to start the new month and it's prompting more to wonder if the January decline is going to be followed by a deeper one.

Week's Indexes

Review of Major Stock Indexes

A look at last week's performance by the indexes in the table above shows that most did not have a good week. The Dow was relatively stronger than the others, declining only -1.6%, while the techs and small caps got hit hard, with NDX -6.0% and the RUT down -4.8%. The big-cap tech stocks were hit hard, many of which have already broken below their January lows. NFLX broke below its August 2015 low. But the utility sector, which is a defensive sector, added to its January rally and is now up +8.1% for the year. Interestingly, the Transports rallied +0.5% last week but unfortunately Friday's decline has it looking like a bearish kiss goodbye following last week's back-test of its broken uptrend line from March 2009. All in all, it was not a good week for the bulls, again.

The metals had a good week, thanks partly to the weakness in the US$, which finished the week down -2.7%. Both gold and silver finished the week almost 4% higher. But the weaker dollar did not help oil, which dropped -8.1% for the week and that's after a strong bounce on Wednesday. Oil remains below its downtrend line from last November, having tested it for the 4th time (on Thursday) in the past 6 trading days. And if oil drops back down for at least a test of its January 20th low it will likely drag the stock market down with it.

More and more market analysts are finally starting to understand the strong link between the weak oil market (with the massive debt accumulated by the oil producers), significant credit issues and banks. The banks had another rough week, down -3.9%, and they're down -16% for the year so far. Just another 4% and they'll be in "official" bear market territory. As always, we should follow the money.

The one index that continues to get thrashed is the biotech sector. They lost another -5.4% last week and that sector is now down -28% for the year, well into bear market territory. But this sector needed a serious correction after seeing gains of about +50% in 2013 and again in 2014 and then another +11% in 2015. And if you look at the BTK index you'll see it's now approaching its uptrend line from November 2008 - October 2011, near 2600 (log price scale), which is "only" another -5% below Friday's close. It also tested its 200-week MA at 2648 with the low at 2650. It also effectively achieved two equal legs down from its July 2015 high at 2642. I'm not one to go looking for sharp knives to catch but this index could use a bounce.

A Look At the Charts

Friday finished weak and the question on many traders' minds was whether or not that would lead to weakness on Monday. Weakness could certainly beget further weakness, especially if oil continues to drop lower, and we should find out soon on Monday if the sellers will continue to hit harder. The relative strength in the blue chips could continue and I'll start off the weekend review with them, but interestingly, the weaker techs have a chart pattern that suggests bears needed to be a little cautious heading into the weekend, which I'll show on their charts.

Dow Industrials, INDU, Weekly chart

On Wednesday the Dow dropped down to price-level S/R at 16K and that level held all week. It's not even close to retesting the bottom of its longer-term up-channel from 2011, currently near 15630, as it did with the January 20th low at 15450. The bounce pattern off the January 20th low looks corrective, which normally points to a continuation of the preceding trend (down in this case) but the bullish sideways triangle can't be ruled out yet. This is depicted with the light-green dashed line on the chart and shows how we could remain in a large corrective pattern for most of this year before resuming the longer-term rally. I believe this is a lower-probability scenario because other indexes have already negated this potential but I'll track it until the Dow's pattern negates it with a decline below 15430 in a pattern that might look like the bold red path.

Dow Industrials, INDU, Daily chart

The choppy bounce off the January 20th low is shown more clearly on the daily chart below. The bounce could develop into a larger one but at this point it can only be guessed that it will happen. If the Dow does make another stab higher I see upside potential to the bottom of its previously broken down-channel, near 17650, and maybe up to price-level S/R near 16900. But Friday's selloff has the potential to continue down to at least a retest of the January low, at 15450, if not down to price-level support at 15315-15370, which encompasses the 38% retracement of the October 2011 - May 2015 rally (15315), the February 2014 low (15340) and the August 2015 low (15370). One thing to note on MACD is how it has made it back up to the zero line after coming out of oversold at the January low. If it curls back over at the zero line that's generally a good sell signal (or a buy signal in the opposite scenario). You can see in the recent past how a reversal in MACD at the zero line led to a tradeable reversal.

Key Levels for INDU:
-- bullish above 16,510
-- bearish below 15,863

Dow Industrials, INDU, 60-min chart

The Dow's 60-min chart below shows the parallel up-channel for the bounce off the January 20th low. It fits as an a-b-c bounce correction to the previous decline, forming a bear flag, and the expectation is for the Dow to drop out the bottom, currently near 16100. I show the potential for a decline to 15340 before the end of the coming week but it could certainly take longer. If it does decline as depicted we'd have a setup to get long into opex week, which is typically a bullish week. But while other indexes have already dropped out of their up-channels, as long as the Dow holds above 16100 there is the potential for another rally leg to the top of the channel.

S&P 500, SPX, Daily chart

A similar up-channel for the bounce off the January 20th low for SPX is shown on its daily chart below. As you can see, SPX dropped out the bottom of the channel on Friday and almost made it down to Wednesday's low near 1872. A drop below 1872 and price-level S/R at 1867 (its August 2015 low) would be a stronger indication that a new low is coming. It's possible we'll see a drop down to its March 2009 - October 2011 uptrend line this coming week, near 1760. There's not much support below the January low at 1812 but I think there's a good chance SPX will find support between 1760 and 1800 so don't press short bets if SPX makes it down to that area. As with the Dow, MACD is getting ready to roll over from the zero line.

Key Levels for SPX:
-- bullish above 1945
-- bearish below 1867

S&P 100, OEX, Daily chart

OEX is splitting the difference between the Dow and SPX but looks more similar to SPX with its minor break below the uptrend line from January 20th. Its weekly close was also back below its October 2011 - August 2015 uptrend line, near 847. The previous Friday closed with the strong white candle above this uptrend line and the failure to hold it left a bearish message on the chart. Other than the January 20th low near 810, there could be support near its 200-week MA, near 798 as noted on the chart below. A rally above Thursday's high at 860 would be the first indication that the bounce is going to make it higher before turning back down.

Key Levels for OEX:
-- bullish above 865
-- bearish below 825

Nasdaq-100, NDX, Daily chart

As mentioned earlier, it's interesting that the blue chips were the stronger indexes last week and yet now look vulnerable to the downside, especially if the Dow drops below 16100. The techs were far weaker and yet the setup into Friday's close had me wondering if we'll see a stronger bounce sooner rather than later. The pattern I'm showing for all indexes is a 5-wave move down from December 2nd but because of the new high for the techs on December 2nd, vs. the November 3rd highs, once the 5-wave move down completes we could be setting up for a stronger bounce than just another choppy sideways/up consolidation as I'm depicting for the blue chips. And the 5th wave of the move down from December, which is the leg down from February 1st, could be close to finishing. NDX is close to testing its uptrend line from March 2009 - August 2015, currently near 3985, as well as its January 20th low at 3992. A drop below the uptrend line could result in a stronger selloff to its August 2015 low at 3787 but first keep a close eye on 3985-3992 for support.

Key Levels for NDX:
-- bullish above 4201
-- bearish below 4050

Nasdaq Composite, COMPQ, Daily chart

The Nasdaq is approaching its uptrend line from October 2011 - November 2012, currently near 4285, which crosses its August 2015 low at 4292 at the end of the coming week. In one sign of weakness, the week closed below its uptrend line from October 2014 - August 2015, near 4387. A drop below 4285 would point to its October 2014 low at 4099 as the next support level but at the moment it's looking like we should see support just below 4300 if reached. The potential is for a strong bounce into March after the completion of the leg down from February 1st so don't press your downside bets (trail your stop if short).

Key Levels for COMPQ:
-- bullish above 4637
-- bearish below 4280

Nasdaq Composite, COMPQ, 30-min chart

There's another reason why I felt it might be risky to hold short over the weekend and that has to do with the correction pattern off the January low, which I show on the 30-min chart below. The short-term bullish setup here is for another leg up to create a larger bounce pattern off the January low before it will be ready for the next leg down to new lows. The Dow holding inside its up-channel also supports the idea for a higher bounce pattern and therefore watch carefully to see if the Naz holds above support at 4285-4292. The pattern below shows a 3-wave move up from January 20th into the February 1st high and now we have a 3-wave move back down. Two equal legs down from February 1st is near 4334, only 16 points below Friday's low and slightly above the 4290 support zone. This pattern supports the idea for a strong rally in the coming week or two, potentially up to the 4800 area (the light-red dashed line on the daily chart above). You don't want to be short and fighting that kind of move. But if the Nasdaq breaks below 4280 it will increase the probability that we'll see 4100 before setting up a larger bounce correction.

Russell-2000, RUT, Daily chart

On Friday the RUT also closed below the bottom of its up-channel for the bounce off the January low, currently near 998. It's also holding inside its down-channel for the decline from December and as depicted on its daily chart below, if the decline continues we could see a drop to at least the trend line along the lows from February-October 2014, currently near 960, and perhaps down to the midline of the down-channel, near 930. You can see the rejection at its broken uptrend line from March 2009 - October 2011 (bold green) following the previous Friday's close at the trend line. This week's selloff leaves a bearish kiss goodbye at the broken uptrend line.

Key Levels for RUT:
-- bullish above 1040
-- bearish below 960

SPDR S&P 500 Trust, SPY, Daily chart

The bounce off the January low took SPY up to slightly above the midline of its Bollinger Band, which is about how far previous bounces have made it since the November high. What the bulls would like to see here is a pullback to the bottom of the BB, like it did last September, and then start another big rally off a double bottom. But unlike the bounce off the August low, the bounce off the January low did not result in MFI making it back above the 50 line and is showing us the initial bounce attempt has been weaker and now it doesn't have the same opportunity to pull back to the 50 and launch into a rally. This bounce is weaker and therefore riskier for bulls to go bottom fishing.

Powershares QQQ Trust, QQQ, Daily chart

Because the techs have been weaker, especially the NDX, the QQQ has dropped sharply back down and has already dropped back below the bottom of its BB. Williams %R has quickly dropped back toward the -90 line while volume spiked above the 50M level, which in the past has led to sharp reversals back up. With the potentially bullish setup shown on Nasdaq's 30-min chart I'll be watching closely for a reversal, especially if the January 20th low at 97.25 holds as support for QQQ.


Following the a-b-c bounce correction off the January 20th lows I've been expecting the indexes to drop down to new lows, or at least to test the January 20th lows. Depending in which index you look at we've seen the January lows either broken, such as the banking index, or not yet tested. The bearish pattern calls for the market to work its way lower this week, potentially setting the market up for a rally into opex. But some indexes, such as the Dow and techs support the idea that we could see another rally leg for a higher bounce this coming week.

Unfortunately, with the choppy pattern that we've been in since the January lows it's very difficult to determine which short-term pattern (for this week) will play out but I suspect we'll have a better sense following Monday's trading. I think the higher-odds scenario calls for lower lows this week, especially with some bearish closing prices on Friday, but watch those key levels to the downside and as long as they are not broken we still have to consider the potential for a higher bounce this week before heading lower.

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

Looking for Relative Strength

by Jim Brown

Click here to email Jim Brown

Editors Note:

When the market gives you indigestion, you look for relative strength as the prescription for the cure. In this case we are going to look at Procter & Gamble, the maker Prilosec for a solution to our volatility induced stomach ache. Super Bowl partiers will be looking for Prilosec on Monday as well.

P&P has rallied nearly every day since the January 20th low and the market has tried its best to knock all stocks down equally. When in doubt, look for relative strength.


PG - Procter & Gamble -
Company Description

Procter & Gamble was started in 1837 and has grown to be an international company with hundreds of brands that are household names. This includes products like medicines, diapers, toothpaste, mouthwash, soap of all types, toilet paper, razors and hundreds more. There is not a person in America that does not have at least one P&G product in their home today and most probably have dozens.

They reported Q4 earnings in January of $1.12 that rose +37% on a currency neutral basis. Revenue was $16.9 billion. Revenue declined -9% due to an 8% impact from the strong dollar and a 3% impact from reorganizing in Venezuela as a result of their economic collapse.

P&G saw operating cash flow of $4.5 billion, up +117%. They repurchased $2 billion in stock and paid $1.9 billion in dividends in the quarter.

The guided for flat to low single digit growth in 2016 after an expected 7% drag due to currencies and a continued 3% drag from Venezuela. Absent Venezuela and currencies they could see high single digit revenue growth despite the weakness in the global economy.

In 2016, they expect to pay additional dividends of $7 billion and repurchase another $8 billion in shares.

Everybody knows P&G. This is a no brainer play. P&G has relative strength to the market and no material impact to its operations from the economy. P&G is recession proof because their brands are used every day by everyone.

This is a technical setup with PG shares about to break over resistance at $81. Earnings are a long way off on April 26th. If the market continues lower, we have the protection of relative strength. If it moves higher we should see PG shares retest resistance at $85 or even higher. The December 2014 high was $94.

With a PG trade at $81.50

Buy April $82.50 call, currently $1.78, initial stop loss $77.85


No New Bearish Plays

In Play Updates and Reviews

Nasdaq Collapse

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq collapsed more than 3.2% after a flurry of earnings disappointments and lowered guidance. Suddenly high PE tech stocks are no longer safe and funds hit the sell button.

Linkedin (LNKD) lost -$84 to drop -44%. Tableau Software (DATA) declined -$40 to lose -50%. Lions Gate Entertainment fell -27% after cancelling guidance. The impact of these events caused a massive dump of anything tech or retail oriented. The Nasdaq declined -146 points.

Investors and fund managers can stomach holding high PE stocks as long as the growth continues. The instant that growth pattern stumbles they run for the exits. Having multiple negative earnings events on a single day in an already weak market was the worst case scenario.

When a $30 billion stock like Linkedin can lose $84 in a single day (-$12 billion) that is a huge problem for fund managers. They own a lot of these high dollar stocks, $195 before the drop, and that kind of drop puts those managers immediately behind the performance curve. Having multiple stocks drop 20-50% in a single day is a disaster.

Managers immediately pulled the ripcord on anything that could even remotely be in danger from slowing enterprise spending and from the looks of the decline list anything that was exposed to the retail consumer. Nike, UnderArmour, Amazon, Home Depot, J&J, Apple, etc, were all knocked for huge losses. Sometimes when you are facing a big loss in a position the knee jerk response is to sell other profitable positions before they become unprofitable. This is what happened on Friday.

There are two potential scenarios for Monday. One is a continuation drop where those managers not at work on Friday, hit the sell button on Monday. Add in the margin selling that will occur and we have another down day.

The second potential scenario is that the Super Bowl excitement will erase much of the fear and dread and portfolio managers will go to work on Monday and be excited about all the sudden bargains and buy the dip. If this occurs, it will give managers too shocked from Friday's disaster a rebound to sell into and a new exit point.

If I had to bet today I would bet on the Broncos and a continuation move lower on Monday. I could be wrong on both counts so I will watch the game to see who wins and I will watch the market for direction before I make any trades.

Current Portfolio

Current Position Changes

AOS - AO Smith

The AO Smith call remains unopened.

FL - Foot Locker

The Foot Locker call remains unopened.

BABY - Natus Medical

The Natus Medical call position was triggered at $33.50.

STZ - Constellation Brands

The STZ call position was stopped out.

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)

AOS - AO Smith - Company Description


Shares declined in a volatile market. The position is still unopened. I will consider a lower entry once the market finds a bottom.

Original Trade Description: February 1st

A.O. Smith manufacturers water heaters and boilers for distribution around the world. They also sell water treatment systems that are in high demand in emerging market economies.

They reported earnings last week of 90 cents that beat estimates for 85 cents. Revenue rose +2% to $639.4 million but missed estimates because of weakness in the housing sector in the USA. North American sales declined -3.9% to $413.7 million.

However, operating earnings rose +37.2% to $92.2 million because of higher pricing, higher overall demand and lower steel costs. Overall segment revenue of $1.7 billion rose +5%. This was due to higher commercial demand for boilers.

Sales in the rest of the world rose +14% to $232 million. That was powered by a 15% increase inwater heater demand, water treatment and air purification products in China. That is definitely a country that needs water treatment and air purification.

Very few companies are successful in selling to China but AO Smith is one of them.

The company bought back 329,000 shares in Q4 leaving 2.59 million to buy under the current buyback program. The company had $324 million in cash at the end of the quarter.

They guided for 2016 to earnings of $3.40-$3.55, which would be a 10% growth rate in earnings. They kept the 15% growth rate target for China in 2016.

Earnings are April 29th.

The stock bottomed on the January 29th market crash and have been moving steadily higher. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade over today's intraday high.

With an AOS trade at $70.45

Buy April $75 call, currently $3.30. Stop loss $64.85.

FL - Foot Locker - Company Description


Shares sharply lower on no news. Friday's decline saw a lot of retail stocks collapse. Initial support is $65.50. Position remains unopened until FL trades at $68.75.

Original Trade Description: February 3rd.

Foot Locker is a specialty athletic retailer with more than 3,400 stores in 23 countries and it a leading provider of athletic shoes. February is kickoff month for Foot Locker and they run a series of new ads on TV ahead of the March Madness.

This year the ads will feature comedian Kevin Hart in both Foot Locker and Kids Foot Locker promotions. In Q3 same store sales rose +8% and retailers for sports apparel reported a good holiday season. Foot Locker reports earnings on March 4th.

Nike and UnderArmour already reported strong earnings. UnderArmour reported a record quarter claiming accelerating sales of athletic footwear were growing market share and profitability. Nike reported earnings that increased 21.6% at 90 cents that were 5.1% above consensus. That was the 14th consecutive quarter that Nike has beaten estimates.

The country is currently undergoing a "social fitness" phenomenon with sales of sports watches and fitness training products exploding. Millennials, those born between 1980-2000, have changed the landscape of retail. They now represent 25% of the population. Millennials are far more health conscious than boomers and tend to try lots of different activities unlike boomers that stuck to 1 or 2 sports. Boomers played golf or tennis. Millennials are cyclists, runners, basketball players and any number of other active sports. They are not golfers. Each of these sports requires different shoes. This is where Foot Locker shines in providing a wide range of affordable shoes and athletic apparel.

Foot Locker should have a good quarter when they release earnings next month. With the Foot Locker commercials in February plus the Super Bowl and the build up to March Madness, investors will think of Foot Locker and shares should rise.

With a FL trade at $68.75:

Buy March $70 call, currently $2.65, initial stop loss $66.45

KR - Kroger - Company Description


Sharp drop with the market on no news. No change in the position.

Original Trade Description: January 28th

Kroger is a retail grocery chain with $108 billion in sales in 2014. In Q3, 2015 their same store sales comps rose +5.4% without factoring in gasoline. They have recently been adding service stations to their offerings. They operate 2,774 supermarkets, 148 with in store clinics, 786 convenience stores, 1,330 fuel centers and 326 Fred Meyer jewelry stores in the USA. In all they have more than 161.3 million square feet of operated retail space. They have 37 food-processing plants, 27 dairies, 6 bakeries and 36 distribution centers.

While most people know them as a grocery store they are much more. They operate those grocery stores under many name brands, more than two dozen, as a result of the acquisition of regional chains. They also operate multi-department stores like a small Walmart or Target.

They have more than 422,000 employees and operate in 34 states. They filled 175 million prescriptions in 2014 worth over $9 billion. Kroger earned $3.223 billion in profits in 2014.

Where Kroger is kicking butt is their new organic product lines. They are significantly cheaper than Whole Foods Markets (WFM), Fresh Market (TFM) and Sprouts Farmers Markets (SFM). They are able to compete with Walmart on organics and private label brands because they own their own food processing and distribution centers. They have dozens of store brands than encompass nearly every isle in the stores from frozen pizzas, vegetables, fruit, toilet paper, snack chips and salsa to a complete customer deli in their larger stores. Their private label organic produce covers 60% of their produce department. Their Simple Truth Organic brand is now the largest natural food brand in the USA.

While Kroger has been outperforming the other grocery and fresh food stores their shares took a hit in early January when a division president, Lynn Gust, president of the Fred Meyer division retired after 45 years. He started out as a package clerk in 1970 and rose up through the ranks to be named president and then led the division to more than $10 billion in annual sales.

At the same time Credit Suisse lowered their rating on Kroger because of deflation risks. The deflation risk means prices for products are going to continue lower. However, I view that as a positive. Kroger's costs are going down but the price of their products do not have to go down in lock step. This is a profit opportunity for Kroger. The analyst also said fuel prices will eventually rise and that will take money out of consumer's pockets. Since that will happen across the board to all grocery stores it makes sense to own the one that is making money on gasoline with their 786 convenience stores regardless of the prices.

Shares declined from $43 in early January to $36 on the Wednesday crash. This is long term support and shares are very oversold. Earnings are March 3rd and I expect the stock to rebound, assuming the market cooperates. With support at $36.50 and the stock at $37.81 I view this position as very limited risk unless the overall market crashes.

Shares have consolidates over the last year after a monster rally from $17.50 in early 2014.

Earnings March 3rd. We will exit before earnings.

Position 1/29/16:

Long April $40 call, entry $1.05. No stop loss because of the cheap option.

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


A -3% drop with the market on no news. Stopped on initial support at $60. Relative strength is still good.

I am recommending we target $66.25 for an exit. That is just below resistance at $67.

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.

Update 2/3/16: Target $66.25 for an exit.

STZ - Constellation Brands - Company Description


This was a very revolting development. Constellation crashed -$8.69 on Friday to cap a decline of -$17 since Monday's high. There was absolutely no news. The market crash took retailers of all sorts down hard and Constellation had been an outstanding performer in a volatile market. With stocks like Linkedin, Tableau Software, Lions Gate Films and others losing 20-50% on Friday it scared a lot of fund managers and individual investors into taking profits anywhere they could. I should have exited at the top of the range last week when we had a decent profit. With shares showing strong relative strength for the prior two weeks I thought it would continue. I definitely expected the 50-day average to remain support on any dip and then repeat the prior rebounds. This proves that any stock can crash at any time and without any specific reason.

I plan to add this play back in with a trade over $142 next week.

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.

THO - Thor Industries - Company Description


Thor dipped to support at $50 again with the market crash. No news. No change in position.

Original Trade Description: January 29th, 2016:

Thor designs and manufacturers recreational vehicles for the U.S. and Canada. Some of its brands include Airstream International, Flying Cloud, Land Yacht, Eddie Bauer, Interstate and AutoBahn class B motorhomes. They have dozens of other brands in the conventional travel trailers and fifth wheels.

You would think that motorhomes would be a tough sell in the current economy. We know that Harley Davidson (HOG), Polaris (PII) and Arctic Cat (ACAT) have been having some challenges. That is not the case for Thor. Towable RV sales in the U.S. hit a record high in 2015.

In the last quarter, Thor reported earnings of 97 cents, up from 73 cents. Revenue rose +11.7% to $1.03 billion. Profit margins rose from 12.8% to 14.8%. They have $180 million in cash and no debt. They pay nearly a 3% dividend.

At the end of October Thor's backlog in orders for towable RV units was $710 million. The order backlog for motorized RVs was $341 million. With total backlogs of more than $1 billion and headed into the RV selling season, Thor is positioned to capitalize on price increases, margin expansion and even more sales.

Earnings are March 3rd.

Shares collapsed with the market in early January and bottomed the prior week at $48. Despite market volatility last week, they have been moving steadily higher. I am recommending the March options and we will exit before earnings.

Position 2/1/16 after a THO trade at $52.75

Long March $55 call @ $1.15, no stop loss because of the cheap option.

Original Put Recommendations (Alpha by Symbol)

AMBA - Ambarella - Company Description


The Ambarella put was reentered at the open on Friday at $39.02. Shares lost -$1.92 for the day. Hopefully the Nasdaq weakness with keep them and our other Nasdaq puts headed in the right direction for several days. The excitement over these story stocks appears to be fading.

Original Trade Description: January 27th

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.

Position 2/5/16

Long March $32.50 put @ $1.78, initial stop loss $41.55

BABA - Alibaba - Company Description


Nice continuation decline. Friday was a four-month closing low. Target $58.25 for an exit.

Original Trade Description: January 29th.

This Chinese retailer reported earnings of 73 cents that beat estimates for 70 cents. Revenue of $5.33 billion also beat estimates for $5.08 billion. However, gross merchandise volume rose only 23% to $149 billion and the slowest growth in more than three years. Alibaba has 80% market share in China and they are starting to see the impact of the economic slowdown.

Shares declined after the earnings on Thursday and then declined again on Friday. If it were not for a burst of short covering at the close, they would have ended in the red in a very strong market. They gained only 11 cents on the short covering.

Shares have been declining since mid December when the Chinese economics and equity markets began to weaken further. Investor sentiment is fading as continued questions over accounting issues cloud their results.

It is not that investors are terribly disappointed in Alibaba. They are worried more about China's economic direction with multiple CEOs including Howard Schultz at Starbucks saying China sales are slowing. Add in the constant accounting rumors and investors are leaving the stock.

Shares bumped up against a solid top in Nov/Dec and then faded in January. The stock is about to experience a death cross of the 50-day below the 200-day average. I am looking for a retest of support at $57 from September.

The low last week was $65.34. I am recommending a put position with a trade at $64.85.

Position 2/2/16 with a BABA trade at $64.85:

Long March $65 put @ $3.90, see portfolio graphic for stop loss.

BABY - Natus Medical - Company Description


BABY broke below support at $33.50 and closed at a 15-month low. I am sure this had a lot to do with the Nasdaq crash but we are well positioned for a continued decline.

Original Trade Description: February 4th.

Shares of BABY spiked higher on the 27th when they posted a 27% increase in earnings but revenue only rose +6.4% and failed to meet their projections. They guided for $100 million and came close at $99.951 million so rounded up they did hit their target. However, investors sold the stock almost immediately and the stock has continued slowly lower.

There is nothing wrong with the company. They are transitioning away from selling devices and systems as their primary revenue and more to supplies and services as a continuing revenue source. Once you sell a hospital a bunch of devices it will be years before they buy again. By moving into the supplies area they will develop a constant revenue stream as those supplies are consumed.

One of their products is called NicView that allows families and friends to view the babies over the Internet while they are in the neonatal intensive care units. More than 80 hospitals now have that installed.

They guided for Q1 to revenue of $86.5-$97.5 million, down slightly from Q4 and earnings of 34-35 cents. Full year revenue guidance was $445-$455 million and also down from the Q4 run rate. Earnings are good but that slowing revenue is a challenge.

Earnings are April 27th.

I like Natus as a company. I wish their stock was rising so I could play it on the upside. However, shares are struggling to hold over $34. If this level breaks the next support is in the $25 to $28 level.

With the biotech sector very weak and expected to get weaker I am afraid it is going to rub off on Natus and we will see that breakdown.

Position 2/5/16 with a BABY trade at $33.50

Long April $30 put @ $1.15. No stop loss because of the cheap option.

HPQ - Hewlett Packard - Company Description


HP is stuck in a tight trading range but it will eventually break. 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 is struggling to hold at support at $25 and actually managed to find some buyers at the close. This happens a lot in a big market selloff. Investors are trying to find a stocks that has already lost a lot on the theory that it is oversold and a lesser risk than stocks just beginning to decline.

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 - ETF Description


Market crashed, VIX went higher. I doubt anyone is surprised. 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

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now