Option Investor

Daily Newsletter, Saturday, 3/5/2016

Table of Contents

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

Market Wrap

Resistance Returns

by Jim Brown

Click here to email Jim Brown

For the last week, several resistance levels were broken across the major indexes but the one that counts returned to cause trouble on Friday.

Market Statistics

Friday Statistics

The S&P rallied through strong resistance at 1,999 on Friday morning to trade as high as 2,009 before falling back to earth to close at 1,999.99 and exactly where it will cause the most indecision over the weekend.

I have been showing the following chart for the last two weeks with the Fibonacci retracement levels. We fought the battle at the 38% level and 1,927 two weeks ago. The prior Friday the S&P rallied exactly to the 50% retracement level at 1,963 before dropping back to close at 1,948. This Friday the S&P rallied through 1,999 before falling back to close at that level. Coincidentally the 100-day average is 1,999.82 so there was double resistance at that level.

I received this email from a reader on Thursday.

I realize analysts can have different opinions but I thought things like resistance levels were fact based. Last night Keene said that above 1992 on the SPX would suggest heading to next resistance at 2024. Tonight Thomas seems to be similar but looking at 2020. But you see trouble at 1999. Do you all just read the charts differently or are you saying the same thing and I am just missing it?
Officially Confused.

If that reader was confused, I am assuming there are other readers confused. I pulled up Tommy's chart and the 2,020 level he was referring to was the horizontal support/resistance from the September high and the November low. This is a valid resistance level and I highlighted it with arrows.

In my regular S&P chart that I have been showing for months that 2,020 level has been clearly visible as resistance for a long time.

In Keene's chart from Wednesday he mentions the 50-week moving average (WMA) in blue at 2,033 on the weekly chart and the 200-day moving average at 2,024 on the daily chart (not shown). Both of these are valid resistance levels. Keene was looking for a continued rebound through the resistance at 1,992 to the 50-wma and then a failure at that level. On my chart above, I have been referencing that horizontal resistance as 1,990 for several months but Keene was more accurate at 1,992 from July 2014. I try to use round numbers in my descriptions when possible because humans tend to focus on round numbers and it makes the text easier to read.

As you can see from the various charts above we are all talking about the same levels but we are using different time frames and different focus points. At any given time, there are probably 20 different technical analysis tools that an analyst can use. We each use the ones we like the best. I find it best to use the KISS principle in my descriptions. (keep it simple stupid)

During certain periods in the market the S&P tends to react differently to various technical levels. For instance, the moving averages have not been much use to me recently because the big market moves have been well away from the averages. It was not until Friday that the slowest of the majors (100, 150, 200, 300) the 100-day came back into play. All the daily averages were well above the current market. Also, you can tell by the congestion in Nov/Dec the S&P was ignoring them at that time. The moving averages only work well in a calmer market like the Mar-May 2015 period where the S&P was using the 100-day as support.

With all the technical tools available to us as analysts, it is our job to determine which ones are working in the current market conditions. For the last two weeks I changed my default S&P chart to the one with the Fibonacci retracements because that was the technical levels "I" thought were the most appropriate at the time. Once we move over the 1,999 level for several days, I will discard that tool because it will no longer be relative to the current market and I will focus on other tools that are more appropriate.

I hope that helped readers to understand why each of us is reporting the same thing only in a different way. You can always email me at the link at the link at the top of the page and I will try to answer any questions.

The market stumbled out of the gate on Friday after the February Nonfarm Payroll report showed a gain of +242,000 jobs. That was well over estimates for +193,000 and the initially reported +151,000 gain in January. The January number was revised up by +21,000 to 172,000 and the December number was revised up by +9,000 to 271,000.

The labor force participation rate actually rose by 0.2% but the unemployment rate remained unchanged at 4.9% (7.8 million). The labor force rose by 555,000 workers as more people began looking for a job again. The manufacturing sector lost -15,000 jobs and the service sector gained +257,000 jobs. The energy sector lost -18,000 jobs. The average hourly earnings declined -0.1% after a +0.5% gain in January.

Healthcare added 57,000 jobs and education 29,000. Retail payrolls increased 54,900, hospitality +48,000 and restaurants and bars 40,200. The bad news in the report was that the majority of jobs were low paying service jobs in food service and hospitality. That means cooks, wait staff and hotel maintenance. Since February 2015 the U.S. has created 360,000 food service jobs and only 12,000 manufacturing jobs. Since 2007 about 1.6 million food service jobs have been created and 1.4 million manufacturing jobs lost. Charts

The larger U6 unemployment number declined 2 tenths to 9.7% and a low for this cycle. The number of part time workers rose by 304,000 to 20.615 million so a significant number of the new jobs in February were part time jobs.

Despite the low quality of the jobs created in February there was a flurry of analysts claiming the big jobs number put the Fed rate hikes back on the table. Former Philly Fed president Charles Plosser said a rate hike at the March meeting would be a "close call" if he were voting. He also said the Fed might have to accelerate their hikes in 2016 with some of them being 50 basis points instead of 25 bps.

However, the Fed funds futures are not predicting a material change in Fed posture. The first chart below was the implied probability of a Fed funds rate at 75 basis points after the June meeting at 29.6%. This was the picture on Thursday night. The chart below it is the same chart as of Friday night showing only a 2.4% increase in that probability to 32.0%. That is hardly a big jump.

Charts from the CME FedWatchTool

Thursday Futures

Friday Futures

If we step out farther on the curve to the December meeting, the futures were showing a 40.7% chance of a hike to 75 bps by the December meeting. The second chart shows the probability as of Friday night and the 75 bps probability did not change but the probability of the rate remaining at 50 bps actually declined from 37.3% to 33.1%. However, the chance of it rising to 100 bps rose from 17.7% to 20.2% based on the futures contracts out to December.

From my point of view, the outlook did not change appreciably and the futures are showing very little chance of future rate hikes in 2016. The equity market should not be fearing a rampant Fed.

Thursday Futures

Friday Futures

The economic calendar for next week is relatively light other than the ECB rate decision on Thursday morning. That could impact the markets and the Fed decision the following week. Mario Draghi has repeatedly implied the ECB could make additional changes at that meeting. However, Draghi has a history of trying to talk the markets around without actually doing anything. The markets are expecting some additional stimulus this time so doing nothing could be market negative.

In stock news, Yahoo (YHOO) shares gained +3% after the company said it was exploring the sale of $1 to $3 billion in patents, property and other non-core assets. The CFO told investors at the Morgan Stanley Technology Conference that the committee tasked with planning the sale/spinoff of the core business is also looking at a quick sale of some assets. Yahoo has sold or licensed more than $600 million in patents over the last three years. Shares are at a two-month high after the company hired JP Morgan and Goldman Sachs to explore strategic alternatives, which is code for "find us a buyer."

Big Lots (BIG) reported earnings of $2.00 that beat estimates for $1.98. Revenue of $1.58 billion missed estimates for $1.6 billion. The company also announced a $250 million buyback plan. Shares rallied 2.4%.

Staples (SPLS) reported earnings of 26 cents that missed estimates for 28 cents. Revenue declined -6.9% to $5.268 billion and also missed estimates for $5.4 billion. The company expects sales to continue to decline in the current quarter. Shares fell -3%.

Ambarella (AMBA) reported adjusted earnings of 64 cents that easily beat estimates for 47 cents. Revenue of $68 million beat estimates for $64.8 million. They guided for revenue in the current quarter of $55-$57 million, down -21%, which was below estimates for $62 million. That will be Ambarella's first quarter over quarter revenue decline in 18 quarters. Sluggish sales to GoPro (GPRO) was said to be the reason. A Needham analyst said Ambarella could be forced to cut its revenue outlook by 10-20% for the current year because of GoPro.

Ambarella said it was seeing strong corporate demand in IP security applications and drone sales. However, consumer sales of those items were flat. Shares declined -9% on the news.

Smith & Wesson (SWHC) reported earnings that rose +293% to 59 cents and beat estimates for 39 cents. Revenue rose +61.5% to $210.8 million and easily beat expectations for $174.93 million. The company raised guidance for the current quarter and the full year. For Q1 they expect earnings in the 51-53 cent range and revenue around $210-$215 million. For the full year, they expect earnings of $1.68-$1.70 and well over analyst estimates for $1.42 and their own guidance of $1.36-$1.41 they gave in early January. Smith said they were increasing production rates because inventories had been depleted. There was a record 2.613 million firearms background checks for the month in February. While a record for February that was down from an all time record of 3.31 million in December.

AMC Entertainment (AMC) agreed to purchase Carmike Cinemas (CKEC) for $1.1 billion and assumption of debt. AMC currently operates 5,426 screens and Carmike operates 2,954 screens. Carmike investors will receive $30 a share. Carmike posted earnings on Monday of 27 cents that beat estimates for 10 cents and shares jumped $3 on the news. The announcement of the deal with AMC added another $4. Sellers who tried to short the earnings spike were killed with the new announcement. This is a great deal for AMC because Carmike screens are suburban and rural while AMC screens are mostly urban based. There will be very little overlap. AMC shares rallied on the news so investors saw the possibilities.

The private equity acquisition of Keurig Green Mountain was completed last week and GMCR was removed from the S&P-500. Taking the place of GMCR in the S&P will be UDR Inc (UDR), an independent real estate investment trust. The company owns, operates, acquires, renovates, develops and manages multifamily apartment communities. They have an ownership position in 50,646 apartments and 3,222 homes under development. In conjunction with S&P notifying them of their inclusion into the S&P they immediately announced a secondary of 5 million shares. Goldman Sachs and Bank America are the underwriters. UDR traded 54 million shares on Friday compared to average daily volume of just over 1 million.

A lot of analysts have a lot of different reasons for the rally last week. Some are blaming it on economics, China, etc but I believe a lot of it was due to the spike in crude prices and the expectations for the Fed to hike rates sooner rather than later. The banking sector moved sharply higher after the ISM Manufacturing report came in higher than expected on Tuesday and the auto sales for February came in very strong at 17.54 million units, in a month that is typically weak. Expectations for future rate hikes moved bank stocks sharply higher. That is the heaviest weighting in the S&P.

The second highest weighting is energy stocks. Crude oil rallied 10.6% for the week on absolutely no changes in fundamentals. The S&P Exploration ETF (XOP) rallied +21% since Tuesday's low at $23.97.

The rebound in oil prices came on hopes for a production freeze in the Middle East that will lead to a production cut when OPEC meets on June 5th. These hopes are significantly misplaced. There is a remote chance that a freeze will be honored simply because everyone is already producing at maximum output and cannot produce any more. There is also a remote chance OPEC will come to their senses and cut production quotas at the June meeting but that is three-months away and not a reason for oil prices to spike nearly 11% last week.

However, the oil market has been heavily shorted for more than a year. It was the easy trade for portfolio managers and hedge funds. When the double bottom was formed at $26, a lot of those shorts began covering. Stimulus out of China in the form of another reserve ratio cut helped to accelerate that short covering because China is the largest importer of oil.

As portfolio managers began to cover their oil shorts the price of energy equities also began to rise and suddenly those needed to be covered as well. Energy equities have been shorted even more than crude itself. Worries about defaults and bankruptcies made the sector very attractive to the bears. Suddenly those heavily shorted companies were rising again. Console Energy (CNX) spiked 58% in a week. Why? Because short interest in Console was 29%. Offshore driller Transocean (RIG) spiked 76% last week because their short interest was 36%. Nobody can look at the Transocean chart below and blame that spike on investors suddenly wanting to own Transocean after they reported additional rig cancellations the prior week. That was pure short covering.

Multiply that short squeeze across more than 200 energy stocks and add in the spike in the financial sector and you have a major reason for the market rally. The real question we need to be asking is will it last.

Long contracts on WTI are at record levels after shorts were obliterated. How many more investors will suddenly decide to buy crude oil when the fundamentals have not changed? In fact, the 10.4 million barrel build in crude inventories last week to 518 million barrels is another record high. Why would anyone want to buy crude oil with inventories expected to continue climbing for the next four weeks? You buy crude in April not at the beginning of March. The recent flurry of headlines triggered a monster short squeeze and that caused speculators to buy the bounce.

Without another headline flurry, this bounce in crude prices should fail. While I do not expect it to retest the lows, we could easily return to the low $30s and energy equities should decline with crude.

Longer term as in 2-3 months I do expect crude prices to rise as refiners begin depleting inventories as they build up gasoline and diesel supplies ahead of the summer driving season. It is entirely possible speculators jumped in early this year for the anticipated spring rebound in prices because of the headline flurry about the production freeze. If that is the case then much of the normal spring rise in oil prices is now priced into the market.

There is a little improvement in fundamentals in the U.S. energy market. The sharp rise in inventories has reduced the available storage space. Cushing Oklahoma only has about 3 million barrels left of its 70 million barrel capacity and they need that for operational capability. This means upstream producers are facing a slowdown in pipeline capacity headed into Cushing. Nothing can go into Cushing unless an equal amount is pushed into pipelines heading for the coastal refineries.

Because of the crisis caused by $26 oil last month many producers are actually cutting production. They have decided not to drill any more wells or only drill their very best locations. U.S. production has declined from 9.235 mbpd in late January to 9.077 mbpd last week. That is a decline of -158,000 bpd in the last six weeks. That is down from 9.61 mbpd at the peak last June or a -533,000 bpd decline from the peak. The EIA expects another 500,000 bpd decline in 2016 and another 200,000 bpd decline in 2017.

Active rigs fell another -13 last week with oil rigs falling -8 to 392. That is below the 400 rig low in Dec 2009. Gas rigs lost 5 to 97 and a new 30-year low. Total rigs declined to 489 and only 1 above the historic low of 488 in April 1999 after oil prices fell below $10.

The massive drop in active rigs will lead to a massive decline in U.S. production in years to come since shale wells deplete about 85% over the first three years. However, should oil prices spike back to $45 or higher we could see those rigs be reactivated at a very high rate. Shale production has declined slowly but it could be restarted very quickly. Analysts estimate there is as much as 2.0 mbpd of production that could be brought online within 24 months because the fraclog (wells drilled but not fracked) is continuing to grow. Once prices begin to rise those wells can be completed very quickly.

I went too much in depth about why oil prices are likely to decline after last week's spike but it should only be short term. That means the equity market could also decline with falling crude prices but only in the short term. If for some reason oil continues to rise then equities could follow. The correlation between oil and equities is very strong.

An even stronger correlation is the relationship between the High Yield market and equities. In the chart below, the HYG ETF is in red. Last week the high yield bond funds saw record inflows of $6.5 billion. Rising oil prices removed some of the concern about defaults in high yield debt, which contains a lot of energy debt. The sector spiked and relieved the downward pressure on the S&P. Since the low on February 11th, the HYG is up 7.6% and the S&P is up +10.5%.


So how much is too far too fast? Is a 10.5% rebound in the S&P in 15 trading days something we should be concerned about? Absolutely! We have gone from oversold to overbought and the various factors that gave us lift, oil, energy stocks, financials and the high yield rally, may have run their course.

However, I believe market sentiment has changed. For the first two months of the year, the rallies were sold and volatility was high as we fell into correction territory. After a short term double bottom at just over 1,800 three weeks apart the sentiment has changed to buy dips rather than sell the rips.

March and April are normally good months after a weak start to the year. At the end of April the "Sell in May" cycle begins. I would like to believe that whatever amount of profit taking we could see next week is limited and the sentiment remains bullish into the Fed meeting the following week.

In the chart below the S&P stopped at exactly the 61.8% Fib retracement level and the 100-day average. If we see any material profit taking, we could see a decline back to the 1,963 level or even to the 1,950 level where we battled for a week. Both of those should now be support. If we move higher from here, the high from Friday at 2,009 and the resistance from September at 2,020 should come into play. Note that the downtrend resistance from December is almost exactly 2,020 as well. On the bottom of the chart, the RSI is solidly into the oversold area but as you can see from October, it can remain there for sometime before the pendulum swings back in the opposite direction.

The Dow stopped at exactly the same 61.8% retracement level as the S&P and with the 100-day average at 17,045. These are critical resistance levels and it could be a challenge for the Dow to move much higher. However, the Dow is not as overbought as the S&P as you can see by the RSI at the bottom. The Dow is approaching those levels but could reach that downtrend resistance at 17,300 before the overbought begins to be a problem.

Remember, if energy and financials begin to take profits it will drag the Dow lower.

The Nasdaq Composite is lagging the prior two indexes and just closed over the 50% retracement with a lot of effort over the last couple of days. Friday's 9-point gain was a challenge with a higher open then a drop back into negative territory in the afternoon. A burst of buying at the close put it back in the green. The Nasdaq traded in a 59 point range to end up with only a 9 point gain. The intraday high was 30 points higher than the close.

If the rally were to continue the next material resistance is 4,806 and that is the 61.8% retracement level followed by 4,822 and the 100-day average. A breakout there could see another 100-point gain to 4,926. It would take several very bullish days to push the Nasdaq that much higher. If profit taking does arrive, we are probably looking at a drop back to support at 4576-4600.

The Russell 2000 was the strongest index last week with a 4.3% gain. The Russell has a significant number of financial, energy and biotech stocks. Those were the hottest sectors and therefore the Russell was strong. The index closed just over the 38.2% retracement at 1,078 and that is a critical level. Note also that the index has respected the 100-day average currently at 1,102. Any serious profit taking probably knocks the index back to 1,050 or possibly 1,035. I believe it would take a major market event to knock us back that far but anything is possible. The strength in the Russell has helped stimulate bullish market sentiment and I would sure hate to see that fade.

Note the extreme overbought level in the RSI.

While I would like to see the bullish trend continue next week, I would be surprised if we did not see some backing and filling before moving higher. Until proven wrong I would be a buyer of any dips in expectation for the historical trend for March and April to be bullish. Obviously, anything can derail that trend at any time. The ECB decision on Thursday would be either a boost or a bust for the market. However, the Fed meeting the following week typically produces a positive market on Monday and Tuesday.

Despite our best efforts, analysts cannot predict market movement with a high degree of accuracy. There are simply too many external variables that cannot be predicted on a daily or weekly basis. Investors short oil and energy stocks lost billions over the last two weeks because the rebound was unexpected. Once traders begin to expect something it is normally too late. We just need to trade what the market gives us and always be prepared for the unexpected. In this case the "expected" would be some profit taking and the "unexpected" would be a continued rally.

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Random Thoughts

Where did all the gold go? Blackrock temporarily suspend issuance of new shares in the IAU Gold Trust. The trust has seen inflows every day in 2016 and the ETF has been trading above its net asset value (NAV) for most of the year. IAU has more than $8 billion in gold and has expanded by $1.6 billion year to date. The trust said February marked its largest creation activity in the last decade.

When the demand for shares exceeds the supply the trust can create new shares by buying gold to back them. The trust ran out of authorized shares and they had to request a new registration from the SEC before they could create more shares. For the IAU this is just a paperwork approval process that occurred because demand has surged so suddenly and has nothing to do with the actual gold. However, the press coverage did turn up some troubling facts that may not go away.

I have reported in these pages multiple times over the last several years about the imbalance of "paper" gold compared to "real" gold. Paper gold is where somebody sells shares or ownership in gold that is supposedly stored in their vaults. You get a piece of paper that says you own so many ounces of gold. In reality quite a few of those firms that sell paper gold only have a fraction of the gold required if everyone suddenly wanted to turn in their paper for real gold. This is similar to owning a futures contract on gold. When the contract matures, you can either sell it in the market or file to take delivery.

Just like with any futures contract in oil, gasoline, copper, etc, you buy you are assuming the gold will be there when the contract expires because the company behind the contract has put up some guarantee in order to be able to sell those futures. However, if I wanted to short gold, oil, copper, etc today I would just login to my brokerage account and sell a contract short. That obligates me to deliver that commodity if I do not close the position before expiration. Millions of traders around the world are short gold, oil, etc and could not supply the commodity if required.

As of a couple weeks ago, there were 542 ounces of gold claims (paper gold) for every ounce of "deliverable" registered gold in a warehouse. Presently there are only 72,000 ounces of registered gold in Comex delivery warehouses in the USA. In December, there were only 275,000 ounces. Link At the same time open interest in gold futures is about 40 MILLION ounces. There is no way to cover even a small percentage of those contracts if everyone suddenly decided to take delivery.

Dealers claim they are having trouble finding gold for sale. This gold "shortage" has lifted gold prices from $1,050 to $1,260 at Friday's close. Just imagine if only a small percentage of those holding paper gold contracts decided to take delivery. Gold prices could be several thousands of dollars per ounce in a matter of days.

The paper gold problem has been around for several years. People selling gold "investments" for gold stored in our vaults do not have all that gold stored. They know that everyone they sold to is not going to demand conversion to hard gold at the same time. They can deal with a small percentage of customers requesting their gold in any month because they are constantly selling new investments. Instead of physically holding all the required gold they hold futures contracts for the balance. They are holding paper gold contracts to back up the paper contracts they sold.

Eventually some economic or geopolitical event is going to occur that will have millions of holders of paper gold contracts wanting to take delivery in a short period of time and the paper gold market will collapse. Millions of investors are going to lose a lot of money when it happens. If you own paper gold or silver, I would highly recommend you convert it to real gold and put it in your safe. Not a safe deposit box but a real safe in your home.

The chart setup below has been called the best market indicator ever by John Carlucci. The chart itself is the percentage of S&P-100 stocks over their 200-day average. Currently there are 50% and approaching the rebound levels from October. On this chart, the 55% level would be seen as initial resistance with the 65% level critical resistance.

More importantly, the RSI, MACD and Slow Stochastic indicators are all at very overbought levels. As with all "indicator" systems they tend to over react when the market moves strongly in one direction in a short period of time. The S&P has rallied more than 10% in the last 15 trading days and that would definitely be considered "strongly in one direction." Source

That means the indicators could become even more overbought in the days ahead.

For a market that would seem to be strongly bullish, the investor sentiment numbers did not move very much last week. Bullish sentiment only rose +0.8% while neutral gained +1.3%. The bears are starting to fade with a -2.2% drop. That could all change over the next several days.

Marc Faber, the author of the Gloom, Doom and Boom newsletter said last year he did not think he would ever see another market rally in his lifetime. He is 69 years old. Last week he said "the market is extremely oversold, and from this extremely oversold position we can have a relatively strong rally." However, "this rally is part of the economic cycle and will eventually crest into recession." He projected the S&P would rally to 2,050 but not make it to new highs.

Faber has been wrong far more often than he has been right. As a contrarian indicator this call could be seen as a sell signal.

I reported last week that I thought the majority of the rally was a short squeeze. At the end of February NYSE short interest had risen to more than 18 billion shares and near the record high of July 2008. Short interest has risen for 7 of the last 9 months. We will not know for a couple more weeks how much of that short interest has been erased but it was definitely a factor in the rebound. You can bet that on a percentage basis the decline in short interest has been minimal. You cannot erase an 18 billion share short in just a week or two of reasonable short squeezes. If we were to have some totally unexpected event that sent the market significantly higher, that kind of short interest would be explosive for several weeks. One can only hope for that to come true.

JP Morgan speculated that the current short squeeze has room to run. They said the short interest on the SPY had declined from 5.43% to 4.75% but remains elevated from the 3.54% in early January. Equity ETFs saw $30 billion in selling in 2016. CTAs, which have been partially responsible for the 2016 selloff, are still short equities and have only covered one third of the short positions they opened in January. Source


Enter passively and exit aggressively!

Jim Brown

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"Some people's idea of free speech is that they are free to say what they like, but it anyone says anything back, that is an outrage."

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Index Wrap

In Like A Lion

by Keene Little

Click here to email Keene Little
March has started strong for the stock market, starting with the strong reversal off Monday's low and Friday made it 4 for 4 positive days for March. An old proverb "In like a lion, out like a lamb" is based on weather expectations but it has often been applied to the stock market as well. The last half of that proverb is obviously in question.

Week's Indexes

Review of Major Stock Indexes

"In like a lion, out like a lamb" is a phrase often associated with weather and came from the fact that the month of March usually starts with cold, damp and unpleasant weather but then finishes with much more mild and pleasant weather (spring like). Whether or not this is true for the stock market is questionable but a strong start to March has many traders wondering if it will lead to a weak finish. It's certainly not something we can trade on but it will be interesting to see what follows the strong first week.

The week's economic reports were mixed, starting weak with Monday's Chicago PMI (in contraction territory with a 47.6 reading) but then we received some improved metrics as the week progressed. Friday finished strong with the NFP report showing +242K jobs vs. expectations for +190K. Of course a strong employment number gives the Fed more wiggle room to raise rates and Friday morning's initial reaction to the news was a selloff. That was quickly reversed and the market made new highs for the week on Friday.

Oil had a good week, up +9.6%, and with stock prices and oil prices joined at the hip (for now) that gave a big boost for the stock indexes. A recovery in oil prices helps relieve some of the financial pressure on many of the oil firms (the oil service sector rallied +13.4%) and that in turn relieves some worries about the banks, which rallied +6.2% for the week. The rally in the oil sector helped the RUT (+4.3%) outperform the blue chips, doubling the Dow's +2.2%. The big market, the Wilshire 5000 index, finished +3.1% for a solid week and March has started with a +3.8% gain. It was a good week for the bulls and March has started off with a bang. Now the only question is whether or not it will finish with a whimper.

The McClellan Oscillator (NYMO) is now extremely overbought and in fact the only other time it was more overbought was January 2009. That was the big bounce off the November 2008 low before dropping lower into the March 2009 low. These kinds of readings are important indicators for us because we're trying to figure out if the rally off the February low is just a bear market rally or instead the start of a more bullish run that will take us to new highs. The latter means we want to buy dips while the former means we want to sell the rips and in bear markets the rips tend to be very strong, like the current one. The abnormally high NYMO reading tells me we should be looking to sell the rip.

I know there are some of you who do not like my bearish stance but I think it's important for you to know where I put my money. I can show you pretty charts with lots of lines of resistance and support and let you figure out what it all means. I think it's extremely important that you in fact do analyze the charts and make your own trading decisions but we all read different market analysts as a way to help us form an opinion about which direction to trade. I think the one thing we look for from various analysts is their opinion about what the charts mean. If I offend anyone with my opinion then I suggest you're holding onto a bias too strongly.

I try to let the charts speak for themselves and I'll turn bullish and bearish as the charts tell me and obviously my longer-term opinion of the charts will take longer to change while I change my short-term opinion about direction a lot more often. As we approached the February low I showed why I thought bears were pressing their luck if they continued to jump into new short positions. I was looking for a high bounce correction to the decline, potentially into early March and that's what we got. I've now switched around and I'm telling bulls that you're pressing your bets if you continue to jump into new long positions. It's time to start looking to play the short side again. That is of course just my opinion at the moment, which will change when the price pattern tells me to change.

A Look At the Charts

Wilshire 5000 index, W5000, Monthly chart

Since I stated above that I'm longer-term bearish the market, let me show you why we should all still be bullish. Not that I'm trying to confuse you (wink) but I think it's important to see both sides and why we will always have a debate about what the market is doing, especially if we're talking about different time frames. The Wilshire 5000 monthly chart below shows a parallel up-channel from 2009, based off an uptrend line from March 2009 - October 2011. W5000 rallied above the top of the channel in November 2013 and then fell back into the channel last August. February's low was a test of the bottom of the channel and the bounce into Friday's high has it up to the midline of the up-channel. Notice how the midline acted as support in August-October 2015 and then broke in January. Now we watch to see if the midline will act as resistance.

Obviously it's bullish with W5000 holding inside its longer-term up-channel from 2009 and a bullish wave count for the rally says we need another rally this year to complete a 5-wave move up. It would take the index up to a new all-time high and the first indication this could happen would be a rally above the midline of its up-channel, with a rally above 20800. But the bearish wave count says the throw-over above the top of the up-channel, in 2013-2015, followed by the drop back inside the channel in August 2015 was the first indication that the up-channel is probably going to break ("probably" being the operative word). A break below the February low at 18462 would leave little doubt that the bull market off the 2009 low finished last year. What happens from here will tell us what we need to know about how the rest of the year is likely to go.

Dow Industrials, INDU, Weekly chart

The Dow's weekly chart below shows one idea that would frustrate both sides this year -- a large-range consolidation before heading higher in 2017. A large sideways triangle would fit as a bullish continuation pattern and it would mean the downtrend line from May-November 2015, currently near 17700, will hold as resistance, if reached. The bottom of the sideways triangle is the uptrend line from August 2015 - February 2016 and it should hold as support if the longer-term bullish pattern is correct. A rally above its 50-week MA, currently near 17300, would be a strong indication that the more bullish interpretation (either directly higher from here or after one more "dip" back down to the bottom of the triangle) is correct. But the bearish interpretation is very bearish since the next leg down would likely be extremely strong.

Dow Industrials, INDU, Daily chart

The Dow's daily chart below shows a bearish rising wedge pattern for the rally off the February low and as the Dow often does, it's been "sliding" up along the broken uptrend line from January 20 - February 3 (the top of the rising wedge). There's no bearish divergence on the daily chart (but there is on the intraday charts) and there is additional upside potential at least to price-level S/R at 17138. This was an important support line that broke in January and a return to the scene of the crime would likely be tough resistance for the bulls to break through since the market is now overbought. Just above that line of resistance is its 200-dma, currently at 17182 and coming down. This is a big reason why I say bulls should not be pressing their bets here but instead should now be turning defensive.

Key Levels for INDU:
-- bullish above 17,180
-- bearish below 16,500

S&P 500, SPX, Daily chart

SPX looks like the Dow except it's a little more bullish because of Friday's rally and close above price-level S/R near 1992. It could not have gotten much closer to a weekly close at 2000 if the computers had been programmed a little tighter. With Friday's close it has recovered back above the support line that was broken with the January breakdown and it opens the door to its 200-dma and downtrend line from December, both near 2023. But it's going to be important for this 1992 level to hold as support on a pullback since a close back below the line would leave a head-fake break (bull trap on Friday?). At the moment, with the idea of an a-b-c bounce correction off the February low and the inability to get back above the broken uptrend line from January 20 - February 3, which was tested again on Friday, it's looking more like a bounce correction rather than something more bullish. The bulls need to drive SPX above the 78.6% retracement, near 2041, which would then strongly support an expectation for new all-time highs.

Key Levels for SPX:
-- bullish above 2042
-- bearish below 1930

S&P 100, OEX, Daily chart

OEX also looks the same as the Dow and SPX and it's now close to price-level S/R near 895, which is the level it broke sharply below in January. Its 200-dma is also coming down to the same level, making it an important level for the bulls to break through. A break below Thursday morning's low near 879 would be a confirmed break of the uptrend line from February 11th, which would be the signal for bulls to get defensive and bears to get more aggressive. But if the buyers keep at it, a rally above 895 would lead to at least a test of its downtrend line from November-December, currently near 912.

Key Levels for OEX:
-- bullish above 895
-- bearish below 842

Nasdaq-100, NDX, Daily chart

Following Tuesday's strong rally NDX has been consolidating near the 50% retracement of its December-February decline, at 4321, and has upside potential to at least the 62% retracement, at 4420, which would also be a test of its 200-dma. To indicate the bounce could be complete, the bears need to see a break below its uptrend line from February 11-24, currently near 4275. A drop below 4200 would be further proof the leg up from February completed but it might be good for just a deeper pullback before heading back up again in April to give us a larger a-b-c bounce off the February low.

Key Levels for NDX:
-- bullish above 4420
-- bearish below 4200

Nasdaq Composite, COMPQ, Daily chart

Like the NDX, the Nasdaq finished with a star doji on Friday and following a strong rally this is often the middle candle of a reversal pattern. It needs a red candle on Monday to confirm it otherwise it's simply an indecision/pause day and a white candle on Monday would keep things bullish. Bulls want to see the uptrend line from February 11th hold on a pullback, currently near 4660. Closing above its 50% retracement of its December-February decline, at 4693, opens the door to the 62% retracement at 4807, above which would then have us looking for a test of its 200-dma near 4889, if not price-level S/R near 4920.

Key Levels for COMPQ:
-- bullish above 4920
-- bearish below 4425

Russell-2000, RUT, Daily chart

Thanks in part to the rally in the small cap energy stocks the RUT was the stronger index this past week and starting with Tuesday's rally it broke through tough resistance near 1040, which was its broken/recovered uptrend line from March 2009 - October 2011 as well as price-level S/R at 1040 and 50-dma at 1043. That opened the door to price-level S/R near 1080, which includes its 38% retracement of its June 2015 - February 2016 decline, at 1078. Closing at 1082 for the week was a bullish accomplishment and as long as that holds on Monday it will keep the bulls in charge. The next level of resistance is nearby -- its broken uptrend line from October 2014 - September 2015, near 1097. A close back below 1080 would leave a failed attempt to get through resistance so that's what the bulls need to defend against.

The oscillators are showing us a big reason to be cautious here -- they're now extremely overbought. This by itself is not necessarily a reason to turn bearish since it could lead to just a pullback/consolidation to work off the overbought conditions, but again, bulls need to be more defensive here. The last time MACD was this overbought, in November 2014 it led to a consolidation/pullback into the December 2014 low before continuing higher. The time before that, where MACD was just as overbought, was off the October 2011 low into the October 2011 high. That led to a 62% retracement into November 2011 low before continuing higher. RSI is now as overbought as it was last June, at the high for the year.

Key Levels for RUT:
-- bullish above 1161
-- bearish below 996

SPDR S&P 500 Trust, SPY, Daily chart

SPY continues to push up against the top of its BB and that keeps it bullish until it turns back down from the BB. The MFI finally let go of the 50 line and is now heading toward 70. It's not there and that means there's additional upside potential, although as you see at the December 2nd high MFI stopped short of reaching 70. The one thing that's worrisome for the bulls is volume -- it's been declining as the rally has continued off the February low and volume is less than we had during the decline. Both of these are indications the bounce is likely a correction to the decline and not something more bullish.

Powershares QQQ Trust, QQQ, Daily chart

The top of QQQ's BB started to rise with this past week's rally and that gives it more upside potential. Williams %R is in overbought but holding above the -10 line and flattening out above this line tells us we're in a steady uptrend. But as with SPY, the declining volume during this rally is not a good sign and while the rally can continue on low volume it would certainly have a better chance if we were seeing increasing volume to indicate more investors were jumping in. Instead it's looking like short covering, which could end at any time.


The rally off the February lows has been strong and could easily press higher. The big caution is the dying volume as the indexes press up against strong resistance and the fact that the rally in prices has been perhaps too strong. Previous strong rallies like this have typically been in bear markets, which are known for their strong counter-trend rallies that suddenly flame out and return to their previous sharp declines. I think that's where we are and the risk from here is a quick downside reversal. I was recommending long plays at the February low, to give us a bounce correction to the December-February 5-wave decline, but now I'm recommending short plays at the top of this bounce. It could press higher but I believe that's the riskier play.

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

On the Road Again

by Jim Brown

Click here to email Jim Brown

Editors Note:

Strong auto sales in February showed that consumers are taking advantage of the low gasoline prices to upgrade their autos. However, only about 10% are even considering a new car. The rest are stuck driving their current car that averages more than 9 years old.

The cheaper fuel prices means consumers are driving more and those old car parts are wearing out at a faster pace.


DLPH - Delphi Automotive -
Company Description

Delphi manufacturers vehicles components and provides electrical and electronic, powertrain and safety technology solutions to the automotive and commercial vehicle markets worldwide. Whether you are buying a new car or repairing an old one the odds are very good you are using Delphi parts.

Vehicle sales in February were 17.54 million units on an annualized basis. As we move farther into spring and summer those numbers are going to rise sharply. Cheap gas means consumers are going to buy more new cars and upgrade their rides to the SUV category when possible.

Delphi reported earnings of $1.39 and beat consensus estimates for $1.37. Revenue of $3.88 billion rose +11% and also beat estimates for $3.79 billion. The company guided for full year earnings of $5.80-$6.10 and revenue of $16.6 to $17.0 billion.

Shares rallied after earnings and broke through resistance at $68 last week to close at $71.53. The next significant resistance is $77.25. Earnings are April 28th.

I am recommending we buy the May $75 calls at $2.40 so there will still be some earnings expectation premium in them when we exit before earnings. April options expire on the 15th so premiums will deflate significantly before we ever get to the earnings event. I am recommending an entry point at $72.50 and just over Friday's high. If the market does take profits early in the week we can lower the strike price and entry target depending on what happens to Delphi shares.

With a DLPH trade at $72.50

Buy May $75 call, currently $2.40, initial stop loss $65.85.


No New Bearish Plays

In Play Updates and Reviews

Will Sellers Return?

by Jim Brown

Click here to email Jim Brown

Editors Note:

Now that the major indexes have returned to major resistance, will the profit taking begin? The S&P is up +10.4% in the last 15 trading days and came to rest at 1,999.99 and exactly on strong resistance. The index traded up to 2,009 intraday but collapsed in the afternoon to gain only 6 points.

In my weekend market commentary I suggested we would see some profit taking before the market tried to move higher. I hope that profit taking is all we get. I am not looking forward to a return to the volatility of January and February. I believe market sentiment has changed and we are looking at a buy the dip mentality for the next two months rather than a sell the rally mentality.

While I am expecting some profit taking I did not recommend closing the Russell 2000 ETF play. I am hoping any profit taking will be short and we can resume an upward direction before the FOMC meeting next week.

The Russell had the biggest gain of the major indexes last week but is also lagging the big cap indexes in the rebound race. The Dow and S&P are at the 61.8% retracement level and the Nasdaq at 50%. This suggests the Russell needs to "catch up" with the big cap indexes.

Current Portfolio

Current Position Changes

EMR - Emerson Electric

The long call play was opened today at $50.80.

ATVI - Activision Blizzard

The long call play was stopped out today at $30.85.

THO - Thor Industries

With earnings at the close on Monday we are closing this position at the open.

Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.

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.

BULLISH Play Updates

AKAM - Akamai Technologies -
Company Description


Akamai is still stuck to that resistance at $55.50 even though there have been three closes over that level. We need to be patient.

Original Trade Description: February 26th.

Akamai Technologies provides cloud services for delivering, optimizing and securing online content for business applications on the internet. They are best known for their download delivery solutions for games, videos and audio files.

One of the things Akamai is famous for is archiving web content in centralized data centers geographically located to reduce the time and bandwidth needed to view those files. If you have a website that is visited by millions of viewers, Akamai can continuously monitor that website for changes and then replicate those changes in multiple locations so that viewers near those locations experience fast load times. For instance, a company in Kansas may have a high volume website viewed by people around the world. Akamai can replicate that website in cloud data centers in Los Angeles, New York, Miami, Dallas, London, etc, so a viewer close to one of those locations can get an immediate response time rather than having to pull the content from Kansas where bandwidth and server limitations could slow the response. If you have a million viewers a day all hitting the Kansas server from all over the world the lag time is going to be terrible.

Akamai also offers security solutions for web-hosted content thereby reducing infrastructure costs and increasing productivity.

Akamai reported Q4 earnings of 72 cents that easily beat estimates for 62 cents. Revenue of $579 million also beat estimates for $567 million. They announced a $1 billion buyback of 12.5% of their outstanding shares. CEO Thom Leighton said he was purchasing $10 million personally. The company guided to Q1 earnings of 61-64 cents and analysts were expecting 62 cents. Revenue is expected to rise +8%.

Performance and security revenues rose +16.4% to $286 million as demand for the cloud security products increased. Service and support revenues rose +17.8% to $46 million. Cash flow from operations was $218 million or 38% of revenue. Cash at the end of the quarter was $1.5 billion.

Akamai shares rallied 17% after the earnings on February 10th and reversed a four-month decline. Share barely consolidated after the spike and are continuing higher. Shares inched over resistance at $54.85 on Friday and could be poised to make a new leg higher.

Earnings are April 26th.

I am recommending an entry if AKAM traded at $55.75 and just over the Friday high of $55.55. Shares appear to be consolidating that post earnings run and the intraday ranges have been shrinking, which suggests the buyers are gaining ground.

Position 3/2/16 after an AKAM trade at $55.75

Long April $57.50 call @ $1.63, See portfolio graphic for stop loss.

AOS - AO Smith - Company Description


Excellent breakout from congestion on a what was a weak market intraday.

Target $77.65 for an exit.

Original Trade Description: February 18th.

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 19th market crash and had been moving steadily higher. The market took it lower again to retest that bottom on February 9th. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade at $70.45.

Position 2/23/16 with an AOS trade at $70.45

Long April $75 call @ $1.88. See portfolio graphic for stop loss.

ATVI - Activision Blizaard Company Description


ATVI dipped intraday to our stop loss at $30.85 to knock us out of the position with a 64 cents loss. ATVI had declined for 3 days despite strong fundamentals.

Original Trade Description: February 24th.

Activision announced on Wednesday they had completed their acquisition of King Digital (KING) for $5.9 billion. This is a major milestone for Activision and they now have more than 500 million gamers making them the largest game network in the world.

They produce Candy Crush, World of Warcraft, Call of Duty and more than 1,000 other titles that can be played on mobile devices, consoles and PCs. The games are played in 196 countries. Activision was named one of Fortune's 100 Best Companies to Work For in 2015.

King Digital had 318 million monthly actuve users as of December 31st and offers games in more than 200 countries.

The combination of these two companies creates a powerhouse that will cross market to the combined subscriber base and new subscriptions and sales of new games to the combined user base will explode in 2016. Earnings are going to rocket higher. Activision is projecting 2016 revenue of $6.25 billion, earnings of $2 billion and earnings per share of $1.75. This compares to 2015 revenue at $4.62 billion and $1.19 in earnings.

The earnings on February 11th missed estimates for a variety of reasons and shares fell to a six-month low at $26.50. The rebound was immediate on the impending announcement of the completion of the King Digital acquisition. Shares closed today at $31.72.

With the higher earnings estimates and the King acquisition behind them I am expecting the shares to continue to rise. The high was $40 in December.

Earnings are May 12th.

Position 2/25/16 after an ATVI trade at $32.15

Closed 3/4/16:
Long May $34 call @ $1.51, exit .87, -.64 loss

CAB - Cabellas - Company Description


Cabelas faded slightly after a big game on Thursday. A nickel is not a material loss. Shares need to move over $50 to trigger some short covering.

Original Trade Description: February 17th.

Cabelas is a specialty retailer and direct marketer of hunting, fishing, campiny and related outdoor merchandise. They operate more than 77 retail stores and a large e-commerce website along with direct mail catalogs. They also have a very profitable financial services segment offering a Cabelas Club Visa credit card.

The company has expanded profitability by moving most of its merchandise to its private label brand. Instead of being North Face, Coleman, Redwing, etc, everything is manufactured and sold using the Cabelas label.

Cabelas reported Q4 adjusted earnings of $1.26 that beat estimates for $1.22 per share. Revenue of $1.41 billion also beat estimates for $1.36 billion. Full year revenue was $4 billion and earnings of $2.67.

Merchandise sales rose +10.1% and retail store revenues rose +14.3%. same store sales comps rose only 4.9% because of the unusually warm weather that depressed the sale of cold weather clothing. Financial services revenue rose +15.7% with a 21.3% increase in interest collected. The number of active Visa accounts rose +14.4%.

The company guided for revenues to rise at a high single digit rate with earnings per share to grow in low double digits.

Cabelas shares from a low of $39 in the February dip to close at $48.40 today. I know that is a 25% jump in three weeks but I believe there is more to come. Shares are facing resistance at $48.75 but a breakout there could return to the March 2015 highs around $58. I recommend we position ourselves for the potential breakout.

Earnings are May 21st.

Position 3/3/16 after a CAB trade at $49.05

Long April $50 call, entry $2.07, see portfolio graphic for stop loss.

DNKN - Dunkin Brands - Company Description


Nice gain and a new 5-month high. I am recommending an exit at $48.75 but aggressive traders may want to take half off the table and hold the rest in hopes of a bigger gain.

Target $48.75 to exit.

Original Trade Description: February 17th.

Everybody knows Dunkin Donuts. Consumer consultancy, Brand Keys, named Dunkin Donuts coffee as the top brand for consumer loyalty for tenth consecutive year. I know, you would probably have said Starbucks if you were asked the question but Dunkin Donuts coffee is the most loved. Dunkin was also number one in packaged coffee loyalty for the fourth consecutive year. Starbucks sells more units because Dunkin Donuts did not sell their K-Cups in supermarkets for a long time. Up until recently, if you wanted to buy Dunkin K-Cups you have to go to a Dunkin store. Now they are available everywhere, even in Kohl's stores and Ace Hardware.

Dunkin is changing their business model. They are opening 62 "non-traditional" stores in 2016 in addition to their normal stores. Those non-traditional stores will be located in airports, transportation terminals, casinos and resorts, hospitals, stadiums, grocery stores, military bases, colleges and universities. They are also opening multibranded stores featuring both Dunkin Donuts and Baskin Robbins, their ice cream brand. That will allow for traffic from the morning donut and coffee to the after dinner ice cream treat. They are also adding other bakery goods to their donut menus including a full range of breakfast sandwhiches.

Dunkin currently has 11,700 stores under the Dunkin brand, with 750 of those now non-traditional. They also run more than 7,600 Baskin Robbins in 40 countries. They operate more than 220 stores in Europe.

Dunkin prides itself on the "blue collar" appeal compared to the sometimes snobby views of Starbucks with $10 coffees.

Their Q4 earnings were 52 cents that beat estimates by 2 cents. Revenue of $203.8 million increased 5% and also beat estimates. U.S. same store sales comps rose +1.4%.

Shares peaked just under $44 on February 5th, just before earnings. Post earnings depression and the weak market knocked them back to $40 but they have rebounded to close at $44 today and a five-month high.

No entry trigger because the June option is cheap and we have a long time before expiration. However, earnings are April 21st. We will decide on an exit strategy as we near that date.

Position 2/18/16

Long June $45 call @ $2.05, see portfolio graphic for stop loss.

EA - Electronic Arts - Company Description


We saw another intraday drop of nearly $2 but the rebound erased all but 37 cents of the loss. I did raise the stop loss to $62.45 and just under today's lows.

Target $70.35 for an exit.

Original Trade Description: February 29th.

Electronic Arts develops, markets and distributes game software for online games, game consoles, internet connected devices, PCs, mobile phones and tablets worldwide.

Some of their major game brands are Madden NFL, The Sims, Battlefield, Dragon Age and Plants vs Zombies. In Q4 the company sold more than 13 million copies of Star Wars: Battlefront. That quantity was three months ahead of what they anticipated.

Piper Jaffray said last week that the current generation of game consoles has a long way to go to catch up with the prior generation. They view that as a positive for EA.

The current console cycle is in its third year and Piper said the uptake rate has been 40% to 50% faster than in prior cycles. However, only about 40% as many Xbox One and PS4 consoles have been shipped as the prior generation of Xbox 360 and PS3s. Sales of the older models reached 162 million units and the current generation has only sold about 60 million. Considering the newer versions have many more features the analyst believes the trade up rate will continue to grow for several years. At the end of 2015 EA had 8,400 employees.

The analyst also believes the shift towards digital delivery will also drive margins higher. Piper has an $87 price target on EA.

At the end of January EA reported earnings that beat estimates but revenue of $1.8 billion narrowly missed estimates for $1.81 billion. They raised their full year guidance to $4.52 billion and $3.04 per share. Analysts were expecting $3.10 and $4.56 billion. EA has a history of issuing very conservative guidance. They also said because they sold so many of the star Wars game in Q4 that sales estimates for Q1 were lower. Shares crashed on the news from $71 to $53. Shares rebounded quickly from that crash and closed at $64 on Monday.

Last week EA announced the sale of $600 million in notes and a $500 million stock buyback program that will be completed by the end of May. Rarely do companies announce buyback programs with only a 90-day window. This should continue to lift the shares in the weeks ahead.

EA will present at the Morgan Stanley Media conference at 6:25 PM ET on Tuesday.

I believe EA shares will recapture that $70 level if the market cooperates. I am recommending a short term April $67.50 call, currently $1.62. If the current rebound fades we will not have much at risk.

I am using an entry trigger just in case the afternoon fade today was the start of something bigger. The entry point will be $65.45 and just over the intraday high at $65.25.

Earnings may 5th.

With EA trade at $65.45

Buy April $67.50 call, currently $1.62, no initial stop loss.

EMR - Emerson Electric - Company Description


Emerson added to its gains over resistance but we are not yet clear of the resistance at $50.50. We need a couple more days of gains to get us over the speed bump at $52.50.

Original Trade Description: March 3rd.

While you may not have heard about Emerson Electric they have 110,800 employees and are involved in many different aspects of the economy. They design and manufacture products and deliver services to industrial, commercial and consumer markets worldwide. They specialize in process management valves, meters, switches, regulators and digital plant applications.

A major segment is providing infrastructure, power, uninterruptible power systems, thermal management equipment and integrated solutions for large datacenters and cloud computing installations. They handle climate control, heating and cooling, electrical control monitoring and management.

They reported earnings for Q4 of 56 cents that beat estimates for 51 cents. Revenue of $4.713 billion beat estimates for $4.642 billion. However, revenue was down -16% because of the recession in the energy sector. The CEO said, "Lower oil prices continued to apply downward pressure on oil and gas spending, particularly upstream projects, as well as power generating alternators used in upstream applications."

Shares declined sharply but began to rebound almost immediately. The company plans to spin off its network power business later this year, which will downsize revenue by about $8 billion. They are restructuring to lower costs until the energy sector recovers and are selling noncore assets to reduce complexity. Investors liked the plans that were presented.

The company also declared a 47.5 cent quarterly dividend which produced a 4% yield at the time it was announced.

Their next earnings are May 3rd.

Emerson has resistance at $50.50 and it broke through that level on Thrusday. The next material resistance would be well above in the $60 range with a speedbump at $52.50. I am recommending we buy the June $52.50 call and plan to exit well before earnings. By purchasing the June call it will still have earnings expectations in the premium when we exit before earnings.

Emerson is somewhat of a slow mover so the options are cheap thereby limiting our risk.

Position 3/4/16

Long June $52.50 call, enrty $1.60, see portfolio graphic for stop loss.

FB - Facebook - Company Description


The decline today put Facebook on uptrend support and horizontal resistance at $108 that should now be support. This is a critical level that needs to hold. I raised the stop loss to $105.65 just in case.

Original Trade Description: February 23rd.

I do not really need to tell you what Facebook does. They are turning into the biggest online marketing portal on the planet and they still have not fully monetized WhatsApp, Instagram and several other web portals they own.

Facebook beat estimates for Q4 earnings at 79 cents compared to estimates for 69 cents. Revenue of $5.84 billion beat estimates for $5.37 billion. Earnings rose +46% and revenue +52%. Full year revenue rose +44% to $17.93 billion.

Monthly active users rose to 1.59 billion. Monthly active mobile users rose to 1.44 billion. Every day users watch more than 100 million hours of video. Zuckerberg hinted they were going to create s video space similar to YouTube to expand that video viewing. Average revenue per users rose to $3.73 compared to estimates for $3.43. WhatsApp ended the year with nearly 1 billion monthly active users.

Mobile ad impressions rose 29%. More than 2.5 million advertisers are actively promoting products on Facebook.

Post earnings Facebook shares rallied to $117 before the February market crash knocked them back down to $97. In another newsletter I was trying to launch a play at the 200-day moving average at $94.50 and never got filled. The rebound over the last week to $108 on Monday was solid. With the close at $105 today this may be our best chance for a new entry.

Earnings are April 20th. I am using the April options because they are cheaper than the May by a lot. They expire on the 15th so we will be out before they report.

Because of the market decline today I am going to use an entry trigger. If the market continues lower, I would rather not be holding calls at this level if we can potentially buy them lower.

Position 2/24/16 with a FB trade at $106.45

Long April $110 call @ $3.30, see portfolio graphic for stop loss.

IWM - Russell 2000 ETF - ETF Description


The Russell rallied over resistance at 1,078 intraday to 1,088 but faded at the close to fall back to 1,081 and just barely over that prior resistance. There was significant profit taking intraday but all the major indexes remained positive at the close.

Original Trade Description: February 25th

The Russell 2000 has come alive. Over the last two weeks the small cap index has been surging with bigger daily gains than the big cap indexes. The final resistance hurdle is 1,035 with another speed bump at 1,050 then it is clear sailing until 1,150. That is better than 100 points from today's close.

While we cannot guarantee it will happen the green shoots are appearing Today's gains was confirmation that the Wednesday rebound could be the start of a major move to the upside.

I am recommending we buy calls on the IWM in hopes of capturing the gains on a breakout that could run to the 115 level. The IWM is actually a little ahead of the Russell and was testing that local resistance today.

Position 2/26/16 with an IWM trade at $103.25

Long April $105 call @ $1.91, see portfolio graphic for stop loss.

JNJ - Johnson & Johnson - Company Description


JNJ is still holding the gains from the prior two weeks and remains very close to our exit target. We need one more strong move in the Dow to lift JNJ to that target. No news.

I am recommending an exit target at $108.75.

Original Trade Description: February 24th

JNJ is broadly diversified with more than 250 subsidiaries. If you need a Band-Aid, mouthwash, cold capsule, cancer drug or artificial joint, they make it. They spent about $10 billion on research in 2015. Seven of the 15 new drugs they brought to market since 2009 have annual sales in excess of $1 billion.

They have increased their dividend for 53 consecutive years. The yield today is about 3%. They have a rare AAA credit rating and produce more than $11 billion in free cash flow annually. At the end of 2015 they had $38.5 billion in cash.

JNJ is recession resistant because their products are not bought on a whim. If you need a Band-Aid you buy it. If you have arthritis, you buy Motrin. If you have acid indigestion you take Pepcid. If you are sick you get a prescription for their drugs. This makes them relatively safe in times of economic weakness. With worries over a potential recession in the near future this has powered their shares to a 52-week high.

I do not need to explain JNJ to everyone because we have grown up with their brands. The company was founded in 1886 and is older than anyone reading this newsletter.

The close on Wednesday at $104.94 is right at resistance and a breakthrough here should retest the historic highs at $109 where a breakout to a new high is entirely possible. They have based at the $100 level for the last two years with the exception of the flash crash last August.

Earnings are April 12th.

Position 2/25/16:

Long May $110 call @ $1.30, see portfolio graphic for stop loss.

KORS - Michael Kors - Company Description


Another very small loss after more than a week of gains. No worries yet.

Target $59.85 for an exit.

Original Trade Description: February 22nd

Michael Kors designs, markets and distributes branded women's apparel and accessories and men's apparel. They operate more than 350 stores in the USA and 200 stores internationally. They also license their brands.

Kors shares crashed from $100 in early 2014 to $35 at the end of January on declining sales in the expensive categories that impacted all the major retailers. Inventory levels rose and margins dropped. Kors went from being the premier brand to just another high priced name.

Fast forward to Q4 earnings and everything changed. The company reported a solid holiday quarter when everyone else was just getting by. Kors reported a 6.3% increase in revenue to $1.6 billion that beat estimates for $1.4 billion. Earnings rose to $1.59 and also beat estimates for $1.46. Same store sales rose +2%. Sales overseas boomed +14% with Japan leading with a 68% rise. U.S. same store sales declined -0.9% but that was significantly better than the -8.5% drop in the prior quarter.

Kors heard what customers wanted and shifted to fill that demand. Kors introduced a new line of smaller leather handbags that cost less and customers snapped them up in volume. The company said they were selling so good they were going to raise prices and increase margin. The trend is away from the larger bags that made Kors famous but they adapted and sales are rising again.

Kors also suffered from the strong dollar and weak currencies overseas but overcame the headwinds to easily beat on earnings.

Shares spiked $12 on the news from $40 to $52. After trading sideways for the last three weeks the shares have broken out to a new 52-week high at $55 and appear to be headed for $60 or higher. Investors remember Kors as the leading fashion merchandiser and they believe the company is back on top again.

I want to take that ride to $60 and then see what happens when we reach that level.

Earnings are May 26th.

Position 2/23/16 with a KORS trade at $55.25

Long May $57.50 call @ $2.48, see portfolio graphic for stop loss.

Target $59.85 for an exit.

N - NetSuite - Company Description


Minor loss after a strong gain on Thursday. No material worries yet.

Target $68.85 for an exit.

Original Trade Description: February 19th.

NetSuite provides cloud based financials/enterprise resource planning (ERP) and omnichannel commerce suites in the U.S. and internationally. They also offer customer relationship management (CRM) and professional services automation (PSA). NetSuite OneWorld manages various companies or legal entities across multiple countries with different currencies, taxation rules and reporting requirements.

NetSuite reported adjusted earnings on January 28th of 5 cents compared to expectations for 4 cents. Revenue of $206.2 million rose +33% and beat estimates for $205 million. They reported several new accounts including Snapchat, American Express Global Business Travel and Lucky Brand to name a few. They added 616 new customers in the quarter and replaced SAP in 17 accounts. Recurring revenues rose +30% and now make up 80% of revenue. Nonrecurring revenue of $41.7 million rose +34%. They ended the quarter with $379 million in cash.

Revenue for 2016 is expected to rise 28-31% with earnings growing 80% to 100% to a range of 40-45 cents.

NetSuite was upgraded by Canaccord Genuity from hold to buy after earnings.

Not many companies are growing annual revenue by 30% and earnings by 100%. This is NOT Tableau software but it was punished for Tableau's weakness.

Earnings are April 21st.

Position 2/22/16 with a trade at $56.50

Long April $60 call @ $2.40, see portfolio graphic for stop loss

PII - Polaris Industries - Company Description


Minor loss of 11 cents after a gain of +$1.71 on Thursday. I would love to repeat that trade every 2 days.

Original Trade Description: February 25th.

Polaris makes off road vehicles, snowmobiles and motorcycles. They compete with Arctic Cat and have 8,100 employees. They are about four times larger than ACAT. They had some earnings issues from the lack of snow but their motorcycle business helped smooth out the rough spots. The company reduced guidance in December and shares declined from $96 to $68 by late January.

In Q4 sales declined -20% because of the lack of snow but also because of the oil recession. They sell a lot of off road equipment to oil field workers and they are not buying today. When oil field workers are employed they make a lot of money with starting wages in the $70-$80K range when times are good so there is a lot of extra cash floating around. Retail sales in oil regions were down -10% in Q4.

However, despite the lack of snow and a rough Q4 the company still managed to increase sales for 2015. That is impressive when snowmobile sales declined -25%. We have had some significant snowstorms in 2016 so that snowmobile inventory is probably shrinking in Q1.

Motorcycle sales rose +43% in Q4 so there is a bright side to warm weather and no snow. Sales in that division were up +74% for the full year.

Polaris is the number one off road vehicle manufacturer in the U.S. and are expecting a better 2016 with most of the growth in the second half.

Earnings are April 26th.

Shares are about to break over resistance at $89, market permitting. I am recommending the April $95 calls currently $2.00 on a breakout.

Position 2/26/16 with a PII trade at $89.50

Long April $95 call @ $2.15, see portfolio graphic for stop loss.

QCOM - Qualcomm Company Description


Still holding its gains after a three-week rebound. We need to move over next resistance at $53.25 to kick off a new leg higher towards the $60 level.

Original Trade Description: February 24th.

Qualcomm holds the major patents on the 3G/4G wireless technology and their chips are showing up in more and more phones every month. Several days ago they signed a new licensing agreement with Lenovo for 3G and 4G technology for use in China. The devices will be marketed under the Motorola and Lenovo brands. Under the agreement Qualcomm will receive royalties on 3G (WCDMA and CDMA2000) and 4G (LTE-TDD, TD-SCDMA and GSM) devices. Lenovo will design, produce and market lower priced phones for the Chinese market.

A couple days later NXP Semiconductors (NXPI) and Qualcomm announced the integration of an industry-leading near field communication (NFC) and embedded secure element (ESE) solutions for Qualcomm's Snapdragon 800, 600, 400 and 200 processor platforms. This provides Qualcomm an end-to-end solution for mobile transactions and payment processing.

A day later Qualcomm announced the Snapdragon 820 processor with integrated Snapdragon X12 LTE modem for 33% faster 4G+ LTE download speeds and 200% faster LTE upload speeds, would power the new Samsung Galaxy S7 and S7 Edge phones. When coupled with the Samsung TruSignal multi-antenna boost technology, these will be the fastest phones currently in production.

A day later Qualcomm announced its collaboration with Ericsson (ERIC) on the new 5G technology, which is expected to be in production in 2018. The companies are doing the development work necessary on the 3GPP platform to insure rapid adoption of the new ultra high speed wireless technology. This puts Qualcomm at the forefront once again.

According to ABI Research, Qualcomm held a 65% market share of the 4G LTE baseband chipsets in 2015. The 4G LTE market is expected to grow at a 78.6% CAGR through 2019 when the 5G phones will begin to be plentiful. ABI said the Snapdragon 820 chip would probably increase Qualcomm's market share in 2016. Because of their dominance ABI believes Qualcomm will be able to increase the average selling price as the demand for the high end phones increases.

All the buzz about the new partnerships and deals has lifted QCOM shares out of a two-year decline. Shares fell while Qualcomm was fighting various companies about royalty payments in China. The new agreements with Chinese companies clearly show those problems are behind Qualcomm. All the analyst ratings changes in 2016 have been upgrades. Bernstein upgraded them to a buy last week.

I believe the long term downtrend is being reversed and although Qualcomm is up $10 over the last two weeks the positive rebound can continue. Normally I would not touch a company with a 25% rally in progress but the news is so strong I believe it is worth a chance. The most recent analyst price target is $70.

Earnings April 27th.

Position 2/25/16:

Long April $52.50 call @ $1.58, see portfolio graphic for stop loss.

SBUX - Starbucks - Company Description


The support at $58 is holding but we had three days of decline since the big spike on Tuesday.

Original Trade Description: February 19th

You know what Starbucks does. They are the premier coffee retailer in the U.S. and Europe. Shares were crushed in early February after sales growth slowed in Europe. CEO Howard Schultz said they were headed for a record Q4 until the Paris attacks and everything just stopped. Consumers avoided the streets and especially retail establishments. Schultz said conditions were returning to normal and 2016 would be a good year.

U.S. same store sales rose +9% and +6% internationally excluding Europe. Earnings are expected to grow 15% annually for the next five years. They are opening 500 stores a year in China over that same period. The currently operate 21,000 stores in 66 countries. Schultz expects annual revenues to double from $16 billion last year to $30 billion by 2019.

To do this they are constantly adding more menu items including baker goods, sandwiches, desserts and even beer and wine to create an "evening experience" to expand their profitable hours. The average Starbucks customer visits a store 16 times a month with many making daily visits.

The post earnings crash in early February was more market related than earnings related. With double digit earnings and revenue growth and a proven business model there is nothing not to like about Starbucks.

Shares have rebounded from the $53 low on February 8th to $57.66 on Friday. Nomura initiated coverage on Friday with a buy rating and $70 price target. I am recommending the June $60 call and we will exit before earnings. I am using the June options so there will still be an earnings expectation premium when we exit before the event.

Earnings April 21st.

Position 2/22/16 @ $58.63:

Long June $60 call @ $1.46, see portfolio graphic for stop loss.

THO - Thor Industries - Company Description


THO held its gains and would probably hit our exit target next week but it has earnings on Monday after the close. We do not want to hold over earnings so I am recommending we exit at the open on Monday. If we are lucky, there will be a big gap open in the market to take us out for a good price. We are up 100% in the trade so it has been a good run.

Earnings March 7th after the close. Exit Monday at the open.

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, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

HPQ - Hewlett Packard - Company Description


HPQ posted a minor gain after HPE beat on earnings Thursday night and rallied 13%. That big gain from the sister company obviously did not help HPQ shares. The trend is still our friend and a positive market could see HPQ continue to move higher.

We should see the directional move continue. We are agnostic on direction since we have both a put and call but the prior direction was bullish and the call is already profitable. We do not care which direction it moves just as long as it moves several dollars in that direction over the next two months.

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.

VXX - iPath S&P 500 VIX Futures ETN - ETF Description


The VXX rose slightly after dropping to $21.05 at the open. The Dow fell -116 points off its highs before rebounding slightly into the close. This reinflated the VIX futures on the drop. The exit target is $20.

Because we are running out of time on the March put, I have an exit target at $20. That should give us a small gain. The volatility rebound in mid February sidetracked the original play and we need to take a gain if one is offered.

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 do not 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

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