Option Investor

Daily Newsletter, Wednesday, 3/23/2016

Table of Contents

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

Market Wrap

Bulls Blink

by Keene Little

Click here to email Keene Little
The stock market has been working hard to hold onto its gains from the rally off the February low but today's loss, while relatively small, showed signs of cracking in the support levels. Bulls can still save it here but with such an overbought market up against strong resistance it's looking like it could be time for at least a rest period for the bulls.

Today's Market Stats

The market has been working hard this week to hold onto the gains made since the February 11th low. By not giving up much it remains potentially bullish since it's easy to interpret this week's minor pullback as just a small correction within the larger rally pattern. But the problem for the bulls right now is an extremely overbought market, by several measures, and very high bullish sentiment. Both measures are at levels that marked trouble for bulls in the past. Price hasn't confirmed we've started a reversal back down but that's the risk for those holding onto long positions.

It was a quiet morning for economic reports and the only important one was new home sales, which at 512K was as expected. That was an improvement over January's 502K (revised upward from the originally reported 494K), but the bigger picture for housing is showing some signs of aging. For the past year new-home sales have essentially leveled off but as can be seen in the lower chart below, price appreciation has been slowing since 2013 and the latest report shows the 3-month average has dipped into negative territory (prices are declining). Despite historically low mortgage rates and banks easing their lending standards (there are many signs the banks are starting the same sub-prime lending that got them into so much trouble last time), making it easier and cheaper to get a mortgage, a lack of demand for houses has resulted in slowing price appreciation.

Exacerbating the declining demand for new houses is the decline in homeownership rate, which has now declined to a rate (near 63%) that hasn't been seen since the mid-1960s when records started. That's a near 50-year low and represents a strong headwind for new home sales. Part of the explanation is the loss of the middle class standard of living, which represents a whole slew of economic problems but that discussion could take pages of digital ink. Hint: it's one reason why Trump has become popular, much to the dismay of the establishment and those who don't understand the plight of the disappearing middle class.

New Home Sales and Prices

So much of our economy is dependent on the housing market and at the moment it's not looking as good as we'd like to see it. The stock market has done an outstanding job holding up in the face of deteriorating economic conditions and corporate earnings decline. The mountain of debt facing our country and businesses is a potential ticking time bomb (much worse than the situation prior to the 2008 collapse) but the stock market has held up despite all that. In spite of all the doom and gloom possibilities we've had a strong stock market and that's been bullish if only because the market hasn't declined. It hasn't gone anywhere since the Dow reached its current level in November 2014 but the bulls are happy it hasn't declined (and the bears have been frustrated to no end).

Consolidating sideways following a strong rally is actually bullish and that has to be respected by the bears. As I've been showing with the Dow's weekly chart (and updated below), we have a big sideways triangle pattern that says the bulls will be rewarded with a big rally in a few months. But at the same time, the deteriorating economic and corporate conditions, as well as the extreme debt levels, is a warning sign that should not be ignored by the bulls. All big moves start off small and what we need to try to figure out is what small pattern will provide clues for the larger pattern.

The market's price/time patterns rarely repeat exactly but the patterns do tend to be fractals. Just as you see repeating patterns in nature (such as Fibonacci ratios) so too do they repeat in the stock market. The reason we trade price patterns is because they tend to repeat. Think bearish rising and bullish descending wedges, triangles, flags, etc. There is currently an interesting price pattern that has played out like we saw from the August 2015 low into the November 2015 high. As this pattern has played out it has pushed indexes into potentially strong resistance. And while the price pattern has repeated we also have bullish sentiment repeating in lock step with price.

Jim alluded to this as well in his wrap last night. The Dow's pattern is a good example with its double bottom in August-September 2015 with the higher low in September. The rally from September into the November 3rd closing high was 25 trading days. The January-February 2016 double bottom, with a higher low in February, led to Monday's closing high (so far), which was 26 trading days from the February 11th low. BTW, March 21st was also the spring equinox, a date that is often seen accompanying market turns. Tuesday the Dow made a new intraday high and came within spitting distance of its downtrend line from May-November 2015, which considering how overbought the market is, should be strong resistance at least to the first attempt to get through it.

At the November 2015 high the Dow had retraced 93.5% of its May-August decline. At Tuesday's high the Dow was within 13 points of retracing the same 93.5% of its November-January decline. While the market doesn't necessarily repeat exactly, that's about as exact as you can get, in both time and price. While it doesn't mean the rally will top out right here, it does mean bulls need to be cautious about pressing for more; you need to ask yourself if you would initiate a new long position here and if the answer is "no" then the next question to ask if it's worth holding on for more. Is the profit:loss ratio in your favor? If not then get your stop up tight.

As mentioned above, the sentiment picture is also repeating. The CNN Fear&Greed index is a great indicator since it combines several sentiment measures into one indicator and as you can see on the chart below, it climbed above the level where it was last November. A turn back down from the high usually precedes a turn down in price (the market simply runs out of buyers as bullishness begins to wane) and as you can see on the chart, it has started a turn back down from near 80, a level that has always meant danger for bulls.

Another sentiment reading comes from Tom McClellan, as shown on the chart below. The difference between bulls and bears, as reported by Investors Intelligence, is at a spread that's now wider than where it was at the November-December highs. It is well above the top of a trading band and more extended above the top of the band than at any time prior to 2014. With price lower than the November-December highs we have investors feeling even more bullish than back then, which is usually not a healthy combination.

Investors Intelligence Bulls-Bears, chart courtesy mcosillator.com

Here's another sentiment measure, which uses the VIX. We all know VIX reflects sentiment through the price of SPX options. It is most often a direct inverse picture of SPX and therefore it's not exactly predictive (any more than the SPX indicators). But when you create a ratio with VXV, which is the 3-month average of VIX, you get some interesting signals, as can be seen on the chart below (the middle chart). I've highlighted those highs and lows (above 1.0 and below 0.8, resp.) that at the very least warned traders that the move had extended into reversal territory. The bottom chart is of the VIX and its Bollinger Band. Notice how few sell signals are offered vs. the VIX/VXV, especially compared to the number of buy signals (green circles). Due to higher emotions in a decline it's more common for the VIX to spike above the top of its BB rather than buying causing a spike below the bottom with a stock market rally. It takes a little time to study the chart below to identify where the signals work and just as important, where they don't work. Look for corresponding signals to get a better idea for where it paid to take the signal.

SPX vs. VIX/VXV vs. VIX, Daily chart

The top chart above shows how many market highs did not have a corresponding low VIX/VXV (below 0.8) and a VIX reading that was not down to the bottom of its BB. Some SPX lows did not have a corresponding high VIX/VXV reading (above 1.0) but most important price lows did have an accompanying VIX high above the top of its BB. But a combination of a signal from VIX/VXV and VIX gave reliable reversal signals and we currently have one that's strongly warning of an important price high here. Bulls ignore this warning signal at their own risk.

With that let's move to the charts to see what price patterns I'm watching. The Dow's weekly chart

Dow Industrials, INDU, Weekly chart

With the Dow's high on Tuesday, near 17649, it stopped only about 16 points shy of its downtrend line from May-November 2015. Considering all the warning signals mentioned above it was a very good setup to get short (if you practice good money and risk management) since it's an obvious line of resistance to anyone who can draw a trend line on a chart. The pullback since Tuesday could easily get reversed but again, it's a low-risk spot to play a reversal. As for what's next, assuming we'll start at least a deeper pullback, we could see just a pullback before heading higher or we could see a drop back down to the bottom of a bullish sideways triangle that the Dow has been in since May 2015. Triangles are typically whippy and choppy and so far that's what we've seen. The bearish interpretation of the pattern is looking for a very strong decline in a 3rd of a 3rd wave down and a break below the triangle would be the recognition phase of the move (failed patterns tend to fail hard). But we have plenty of time to figure out what the next pullback/decline is telling us.

Dow Industrials, INDU, Daily chart

The daily chart shows what looks like a perfect tag of its downtrend line followed by the pullback into today. Today's low was a test of its uptrend line from February 11th, near today's close. Closing at support left both sides wondering what will follow and if the market is not done yet putting in a final high for the leg up from February we'll see a bounce off support and potentially a break above the downtrend line, now near 17665. But if the high is place then support will likely be broken with a gap down Thursday morning. That's the way this market deals with support and resistance and which way it gaps over resistance or below support provides a valuable clue as to which direction offers the least resistance.

Key Levels for DOW:
- bullish above 17,670
- bearish below 17,140

Dow Industrials, INDU, 60-min chart

The Dow's 60-min chart below shows the test of the uptrend line from February and now we wait to see what follows. If it continues to rally and breaks its downtrend line from May-November 2015 I'd look for a move up to the top of a parallel up-channel for the portion of the rally from the March 10th low, so perhaps up to about 18K.

S&P 500, SPX, Daily chart

Tuesday's high for SPX was a test of its downtrend line from November-December 2015 and the reversal from there looks a little more bearish than the Dow because it broke its uptrend line from February 11th, currently near 2050. Regardless of whether the longer-term pattern from here is bullish or bearish (yet to be figured out), the short-term pattern calls for at least a deeper pullback. This is why I think playing the short side is now the better trade. Once you can give the trade a little breathing room you can then follow the trade lower with your stop. If the pullback turns into a corrective form (e.g., overlapping highs and lows in a bull flag) then I'll look for a setup to get long for the next big rally leg. But if the pullback turns into an impulsive move (steep and strong) then I'll know to look for bounces as shorting opportunities with the expectation that the January-February lows will break.

Key Levels for SPX:
- bullish above 2057
- bearish below 2024

Nasdaq-100, NDX, Daily chart

On Monday and Tuesday NDX had closed above its 62% retracement of its December-February decline and its 200-dma, at 4415 and 4419, resp. But today it closed back below both, which leaves the potential for a head-fake break. However, like the Dow, NDX held its uptrend line from February 11th, closing on it at 4402. The bulls need to start buying immediately on Thursday in order to prevent a trendline break.

Key Levels for NDX:
- bullish above 4450
- bearish below 4356

Russell-2000, RUT, Daily chart

The RUT has created a double top against its trend line along the lows from October 2014 - September 2015 (a H&S neckline). The first attempt to get through resistance was March 7th and then again last Friday. It made a high at 1103.62 on Tuesday, stopping about a point away from retracing 62% of its December-February decline and now today's decline looks like it should see follow through. This week's high is leaving a bearish divergence against the March 7th high and MACD has crossed back down from a high not seen since November 2014.

Key Levels for RUT:
- bullish above 1105
- bearish below 1040

20+ Year Treasury ETF, TLT, Daily chart

The bonds rallied today and that had TLT breaking out of a bullish descending wedge pattern today. If MACD makes it back above zero and TLT holds above its 50-dma, currently near 129, it should rally fairly quickly and get above its February 11th high (wedges are typically retraced faster than it takes to build them). A strongly rallying bond market, if that's what's coming, would likely be the result of a run to safety into bonds and out of the stock market.

KBW Bank index, BKX, Weekly chart

BKX made it up to price-level S/R near 66.50 with Monday's high at 66.47 (close enough for government work) and while the reversal from there is only a small pullback so far, the odds say it will continue the reversal back down. It's holding above its 200-week MA at 65 (today's low was 65.19) and if that holds as support we could see resistance at 66.50 broken. But again, in an overbought market I think it's a risky bet on the long side here.

Transportation Index, TRAN, Daily chart

The TRAN is one of the few bullish patterns that I'm watching at the moment. It made a bullish break last Friday when it rallied above its downtrend line from March-November 2015, near 7980, and today it made it back down to the broken trend line, as well as its 78.6% retracement of the leg down from November 2015, near 7940. Monday's high, at 8114, stopped short of its 62% retracement of its decline from November 2014 into the January 2016 low, near 8200, and is not showing us any bearish divergence at Monday's high. If the back-test of its broken downtrend line holds it could lead to a bullish kiss goodbye and another rally leg, one which would probably make it up to its November 2015 high at 8358. But the current back-test must hold otherwise it will leave a failed breakout attempt and failed breakouts usually reverse hard as those who bought the breakout bail en masse.

U.S. Dollar contract, DX, Weekly chart

This week's bounce for the US$ has it back up against a broken uptrend line from August 2015 - February 2016, near 96. I think the dollar will work its way a little lower, perhaps down to the 93-94 area, before heading back up inside its large consolidation pattern.

Gold continuous contract, GC, Weekly chart

Gold has now rolled over from the top of a parallel down-channel for its decline from August 2013. There's no definitive pattern yet for its pullback from the March 11th high so it could still press higher following the current pullback. Looking at short-term price projections based on its pullback pattern, it would turn more bearish below 1210 so below that level I'd get more defensive if you're a gold trader (vs. a long-term holder of the shiny metal). We could see a drop down to the bottom of its down-channel and price-level S/R near 1000 in a few months. Gold traders became way too bullish on the rally and for a healthier rally it at least needs to shake out the weaker holders (those not committed yet to the longer-term bullish possibilities).

Oil continuous contract, CL, Weekly chart

Today's report showed crude inventories spiked up in the past week, up 9.4M barrels and that sparked some selling, which dropped the price of oil -3.5% today. Tuesday's high at 41.90 was at the top of a parallel down-channel for the decline following its June 2015 high and MACD has made it back up to the zero line. A rollover from both would be bearish and then it will be a matter of figuring out if we're looking at just a pullback or a more significant decline that will take oil to the bottom of its down-channel. At the moment, based on its larger wave pattern and until proven otherwise I'm looking for oil to drop to a new low, perhaps down to the $21 area before setting up a longer-term bottom.

Economic reports

Other than the weekly unemployment numbers tomorrow we'll get the Durable Goods orders, which are expected to be flat (ex-transports) to about -3% (total goods).


Time and price have come together to suggest at the very least that bulls need to be thinking defensively. That might mean selling to some and/or hedging with short positions to others. Bullish sentiment and overbought indications also suggest the bears should soon have a turn at the feeding trough. Trading is a game of probabilities and right now I think the higher probability is for at least a deep pullback before the market will be able to head higher. The more bearish price pattern says the two big bounces, into the November 2015 high and the current high, are merely a result of a big battle within a rolling top pattern and when it breaks down next time it's going to be a hard break and well below the January-February lows.

We can't know yet whether we'll get just a pullback before heading higher or instead something more bearish but considering the downside risk I think it's a very good opportunity to trade the short side, which of course means get defensive if you're holding long positions. At least protect your big gains. If while in a short position we see the market chop its way lower, such as in a bull flag pattern then turn less bearish and get ready to buy the pullback. But that won't become clearer for at least another week or three so in the meantime think short and watch out for those short-covering rallies.

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

Keene H. Little, CMT

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

New Option Plays

One Day Wonder?

by Jim Brown

Click here to email Jim Brown

Editors Note:

Wednesday's decline could be the start of a real 3-5% correction after a five-week gain or it could be just a hiccup in the recent uptrend. We do not know where the market is going until Monday. Historically, the market rallies into Easter weekend but the calendar may bite us this time with Good Friday falling in what is normally a neutral week for fund buying. Managers are trying to decide how to modify their portfolios for the end of the quarter and those moves will be made next week.

One day does not make a trend. I am not adding any new plays today. We are already heavily weighted to the bullish side and I am not ready to commit to a bearish market move. You know from my commentaries I am expecting a market failure but from a higher level 2-3 weeks from now.

We do not need to add new plays just because the market is open. This is especially true in what will be a very light volume day with event risk over a 3-day weekend.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Resistance Matters

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes paused at downtrend resistance for four days and finally that failure to continue higher turned into some real profit taking. The real question today is whether this is just a one day wonder or the start of a retracement.

The S&P was up +13% over the last five weeks and typically that results in a 3-5% retracement for profit taking and position shuffling. One day's decline does not give us any clue for future market direction. Do we buy the dip or close long positions?

Since the speed and volume of today's decline was muted I am not going to close a bunch of positions but I am adjusting a couple stop losses just in case we go lower. We were not stopped out of anything and that shows how the overall decline was minor. However, we did see the gains in many positions shrink back to losses. If the market rebounds into the Easter weekend as it normally does we will be ok. If it continues down on Thursday, we could lose several positions.

We entered the SPY put position at the open this morning. When the S&P stalled at resistance for several days I recommended entering that put at today's open. If the market goes lower we have a small hedge against our long positions. If the market goes higher I am recommending we add to that position at SPY $207 and $210.

Current Portfolio

Current Position Changes

ADSK - Autodesk

The long call position remains unopened until ADSK trades at $58.75.


The long put position was entered at the open at $204.11.

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

ADSK - Autodesk -
Company Description


ADSK pulled back slightly from the two-month high on Tuesday. The pullback prevented the position from being opened at $58.75.

The long call position remains unopened until ADSK trades at $58.75.

Original Trade Description: March 22nd.

Autodesk operates as a design software and services company worldwide. Their software is used to design buildings, design equipment, machines, products, etc. The software is licensed directly and through a network of resellers. Autodesk goes beyond 3D imaging and allows 3D printing of the design using the Moldflow process in the software.

Autodesk is the premier software of this type in the market today. There are competitors but Autodesk is the largest by far. Competitors are Adobe, Ansys Inc and Dassault Systems. Mattel announced in February it was introducing 3D toy printing at home with the "Thingmaker" in cooperation with Autodesk.

In February the company said it was going to lay off 10% of its workforce or about 925 jobs as it transitioned to the cloud.

Shares collapsed with the market in January but began to rebound in February after the cloud announcement. The company said revenue will increase long term because the cloud model is subscription based. In Q4 they added 190,000 subscribers to the cloud product.

They reported adjusted Q4 earnings of 21 cents compared to estimates for 10 cents. Revenue of $648 million beat estimates for $636 million. They guided for a loss of 12-17 cents for Q1 on revenue of $500-$520 million because of their restructuring process. They are taking an $85 million charge for the layoffs. As part of the movement to the cloud they are going to end sales of their software suite that was previously sold direct by Autodesk and by resellers. That willdepress revenue in the short term but increase it significantly in the long term.

By the end of 2017 they are going to terminate all the existing "perpetual licenses" and force current users into the cloud model. Apparently "perpetual" means different things to different people.

Autodesk had been under fire from two activist shareholders and they resolved that last week when they added three directors to the board. Sachem Head and Eminence Capital agreed to certain standstill and voting provisions to get the board seats. Joining the board are Scott Ferguson from Sachem, Rick Hill, chairman at Tessera Technologies and Jeff Clark, CEO at Kodak.

Shares rallied on the news of the new board members are appear ready to break over current resistance at $58 to retest the December highs at $65.

With a ADSK trade at $58.75

Buy May $60 call, currently $2.85, initial stop loss $54.25.

AKAM - Akamai Technologies - Company Description


Drop back to support after closing at a four-month high.

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


AOS gave back half the gains from last week. No news.

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.

CRM - SalesForce.com - Company Description


Back below resistance on no news.

Original Trade Description: March 14th.

Salesforce.com provides enterprise cloud computing solutions, with a focus on customer relationship management to various businesses and industries worldwide. They provide an entire menu of applications tailored to various industries with an emphasis on sales force automation and customer resource management.

The last six analysts ratings changes have been upgrades with four new analysts initiating coverage with a buy. Salesforce is growing quickly with revenues growing 24% in 2015 to $6.67 billion. Subscription and support revenues rose to $6.21 billion and accounted for 93% of all revenue. These fees continue from quarter to quarter and should continue growing.

Morgan Stanley said customer demand for applications software was expected to remain quite strong and Salesforce.com was positioned to make the most of this development.

The Salesforce.com CEO said sales efforts to enterprise customers were becoming more time consuming because of the greater complexity of the large enterprises but once sold they became very profitable long term assets. Once a large enterprise invests in Salesforce.com and trains its thousands of employees there is a huge inertia factor that prevents them from leaving. That subscription revenue becomes repeatable for a long time.

These longer sales and implementation cycle means that Salesforce.com has a lot of delayed revenue that it will recognize in future quarters in addition to the current revenue for those quarters. This is the equivalent of a snowball rolling down hill. Future revenue is growing even though it is not readily apparent. In Q4, the company reported deferred revenue of $4.29 billion and its unbilled deferred revenue was $7.1 billion.

For Q4 Salesforce reported earnings of 19 cents that matched estimates but revenue of $1.81 billion beat estimates for $1.79 billion. The company guided higher for 2016 and shares rose 8% on the news.

The next earnings are May 18th.

Shares moved sideways from the earnings spike for three weeks and are just now starting to move higher. Given a positive market, I think they will retest the highs in the weeks ahead.

I am recommending the May $75.00 call even though it is a little farther away from the money and slightly more expensive than the April $72.50 call. With only 32 days left in the April cycle we are reaching the point where premium decay will accelerate. If we hit a soft patch in the market the April premiums may not have time to recover. The May premium will cover the earnings on May 18th so when we exit before earnings there will still be some expectation built into the premium.

Position 3/14/16

Long May $75 call @ $2.75. See portfolio graphic for stop loss.

DLPH - Delphi Automotive - Company Description


Good relative strength with a minor decline.

Original Trade Description: March 5th.

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.

Position 3/17/16 with a DLPH trade at $72.50

Long May $75 call @ $2.50. See portfolio graphic for stop loss.

EMR - Emerson Electric - Company Description


Minor decline after a new 9 month high.

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, entry $1.60, see portfolio graphic for stop loss.

JWN - Nordstrom - Company Description


We came within a nickel of being stopped out with the low at $55.90.

Original Trade Description: March 17th.

Nordstrom is a fashion specialty retailer offering apparel, shoes, cosmetics and accessories for men, women and children in the U.S. and Canada. They have a growing online presence as well as the Nordstrom Rack discount stores. They have a private label credit card through Nordstrom FSB, a federal savings bank and two Nordstrom Visa car offerings. As of February they operated 323 stores in 39 states in addition to Canada and Puerto Rico. The company was founded in 1901.

This is a really strange bullish recommendation since 61% of analysts (19 out of 31) have a hold rating and three have a sell rating as of February 22nd. So far in March two new analysts have initiated coverage with a sell rating. The consensus price target is $52.75 and shares closed today at $58.22.

Apparently investors are ignoring the analysts ratings because they think they have it wrong. With all of those negative ratings there are probably a lot of shorts that are cussing as each day goes by with another gain.

The analysts with buy ratings claim Nordstrom's mix of brick and mortar stores and online websites as well as their chain of discount and clearance stores will power the earnings higher in the months to come. Cowen & Company said "Going forward, we believe leveraging Nordstrom's unique multi-channel approach should benefit the top-line given that multi-channel customers spend three-to-four times more than other customers." Stifel wrote, "We do believe that Nordstrom is a market share gainer in what will likely prove to be a contracting market for apparel sales. With its best-in-class omnichannel experience, outstanding customer service and compelling merchandise assortments, both broad and deep, we believe Nordstrom can be a winner despite the more challenging environment.

In late February the company reported earnings of $1.17 and revenue of $4.19 billion that missed estimates for $1.22 and revenue of $4.22 billion. However, revenue did increase 5.2% and same store sales rose +1%. They guided for full year 2016 for revenue to rose 3.5% to 5.5% and earnings in the range of $3.10 to $3.35. Analysts were expecting $3.37. Nordstrom said the weak sales were the result of acquisition expenses, the strong dollar deterring tourist sales and the weak holiday season.

Shares fell to $46 on the news. However, that was the bottom and shares have only been down four days since those earnings. The close today at $58.22 was above strong resistance at $57.75. Since then they have declared a quarterly dividend of 37 cents payable on March 22nd to holders on March 7th.

Earnings May 12th.

I am recommending this as a breakout play with today's close over resistance at $57.75 and the next material resistance at $67. However, just to be cautious I am putting an entry trigger on the play at $58.75. I have been burned several times lately by one day wonders that spike slightly over resistance only to fall back again for a week or two.

Position 3/18/16 with a JWN trade at $58.75

Long July $62.50 call @ $1.83, see portfolio graphic for stop loss.

KR - Kroger - Company Description


Only a minor decline. Should rally with the market. No reason to exit yet. We have a July option.

Original Trade Description: March 11th.

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 Feb-11th crash. This is long-term support and shares were very oversold. In a previous play we bought the dip in February and rode the stock back up to $40.35 and exited before earnings in early March.

In the March earnings Kroger reported earnings of 57 cents compared to estimates for 54 cents. Revenue rose +4% to $26.2 billion and narrowly missed estimates for $26.3 billion. Sales excluding fuel rose +7%. Same store sales rose +3.9% but that was less than the 4.0-4.5% they had predicted in January. Kroger said shifting the Super Bowl into February hurt sales for the quarter ended January 31st. Warmer weather and fewer snow storms also hurt because people stock up on food ahead of storms but shop as normal in regular weather.

The retailer said they expect earnings to rise 6-11% in 2016 to $2.19-$2.28 per share. Same store sales are expected to rise 2.5-3.5%. This is lower than 2015 because of lower inflation.

Investors were not happy with the earnings because most never look at the details and only read the one sentence headline to make their decisions. Shares declined from $40.50 to $36.50 to give us another entry point at support.

I believe Kroger will make a new high this time. Earnings are well out in the distance on June 16th and that will allow us to buy a longer dated option and give it time to mature. Kroger is a slow mover so we need time for it to grow. With support at $36 dating back to the August crash it should be a relatively safe position.

Position 3/14/16:

Long July $40 call @ $1.55, no initial stop loss

N - NetSuite - Company Description


Minor decline with the market. No news.

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

NTAP - NetApp - Company Description


Minor decline on no news.

Original Trade Description: March 11th.

NetApp provides software, systems and services to manage and store computer data worldwide. They provide data protection and data management for virtualized, shares infrastructures, cloud computing and business applications. Their hot product is a storage area network (SAN) that is all flash memory and not spinning disk drives. This delivers super high performance without the mechanical delays and hardware problems associated with disk drives.

JP Morgan is going to host a moderated "Tech Talk" at 10:AM ET on Tuesday regarding the new SolidFire all-flash array architecture. NetApp acquired SolidFire for $870 million in cash in December in order to increase penetration into the high speed storage market. SolidFire was named the "All-Flash Systems Product of the Year" by Storage Magazine in late February.

NetApp reported Q4 earnings of 70 cents that beat estimates by 2 cents. However, that was down slightly from the year ago quarter. They announced a restructuring program to reduce costs as they focus development on the new SolidFire products. NetApp said they were cutting about 1,500 of their 12,810 employees. They guided for current quarter earnings of 55-66 cents that was below estimates for 72 cents. They expect to take some significant charges on their restructuring effort.

Shares crashed on the earnigns news to $21 but the press has been kind to NetApp and share have rebounded to $27 over the last four weeks. I expect shares to continue to rise to initial resistance at $31 and possibly a new high at $35. The momentum is increasing on the NTAP rebound.

Earnings May 25th.

Position 3/14/16:

Long May $28 call @ 99 cents, no initial stop loss.

OA - Orbital ATK - Company Description


One of the few stocks positive in today's market. Once it moves over resistance at $82.85 we should be in good shape.

Original Trade Description: March 19th.

Orbital ATK was created in 2015 by the merger of Orbital Sciences and Alliant Techsystems. The company develops and produces aerospace, defense and aviation related products for the U.S. Government, allied nations, prime contractors and other customers in the U.S. and internationally.

The currently have a contract to convert the four segment Space Shuttle Solid Rocket Booster into a five segment booster for the new Space Launch System that will carry astronauts back into space. They are working on a new rocket booster to replace the boosters the U.S. is currently buying from Russia. They also develop satellites for commercial, scientific and security applications. They also produce the Cygnus spacecraft that delivers cargo to the International Space Station and returns with completed experiments.

The Defense Systems Group provides tactical missiles, defense electronics and medium to large caliber ammunition, fuzed warheads, etc. The Flight Systems Group produces the Pegasus, Minotaur and Antares launch vehicles.

One of their newest projects is the Mission Extension Vehicle or "space tug." When an existing satellite develops a problem and engineers believe it can be repaired, the space tug would go get the satellite and push it towards the International Space Station where it can be repaired and the tug would then push it back into orbit where it belongs. Since these satellites cost from hundreds of millions to billions of dollars each, having the capability to repair them would save a lot of money.

Sometimes the satellite has simply been active for so long that its orbit has degraded. The space tug would attach itself to the satellite and then lift it back into an orbit that would give the old satellite several more years of useful life. Then the tug would disconnect and repeat the process with a different satellite. The tug could also push dead satellites into a descending orbit where they will burn up reentering the atmosphere. That would essentially remove the trash from what is becoming an increasingly crowded orbital space. The first space tug is expected to have enough fuel to keep it active for up to 15 years. They plan to launch 5 by 2020 and with dozens of very expensive communication satellites running low on fuel every year, it will be a very profitable venture. Clients are already entering into discussions on how the tug can help their satellites.

These are just some of the hundreds of thing Orbital ATK has in the works. They were also named a subcontractor on Northrop's new $120 billion B-21 stealth bomber program.

In early March Orbital reported earnings of $1.45 that beat estimates for $1.09. Revenue of $1.137 billion beat estimates for $1.11 billion. Order backlogs were over $13.5 billion. They guided for the full year to earnings of $5.25-$5.50. Shares crashed from $87 to $74 the next day after they filed a statement with the SEC saying the financial statements covering the Q2-Q3 in 2015 were not accurate due to an accounting error that occurred when the two companies merged. It was a non-cash error covering long-term contracts that were accounted for using different accounting methods in each company. There was no material impact from the restatement but shares always crash when an "accounting error" is disclosed.

After two weeks, shares began to rise again one the smoke cleared. Shares hit resistance at $82.60 on Friday and pulled back only slightly. I am recommending we buy a breakout over that resistance with a target at $90.

Earnings May 30th.

Position 3/21/16 with an AO trade at $82.80

Long May $85 call @ $2.80, initial stop loss $76.15.

PII - Polaris Industries - Company Description


Monster -$3.50 decline on what was clearly profit taking. No news. Shares are still well over support at $95.

Target $105.85 for an exit.

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.

PKG - Packaging Corporation of America - Company Description


Minor decline with the market after opening at a new 2 month high. No news.

Target $64.25 for an exit.

Original Trade Description: March 7th.

PKG manufactures and sells containerboard and corrugated packaging products in the US, Europe, Mexico and Canada. They produce shipping boxes, display packaging and protective packaging. They also produce packages for meat, fresh fruit, processed food, beverages and other industrial and consumer products. They also produce papers for the office environment and for specialty printing. They are the fourth largest producer of containerboard and corrugated packaging in the USA.

They reported earnings of $1.08 that beat estimates for $1.03. However, revenue of $1.39 billion missed estimates for $1.42 billion because of the strong dollar. For the full year profit was $4.47 to give them a current PE of 12.

The company announced an additional $200 million stock buyback program at the end of February. They bought back 1.7 million shares in the last 5 months of 2015 and 1.9 million shares YTD in 2016. The company said its "substantial operating cash flow" gave it an "excellent opportunity" to continue buying back its stock and return value to shareholders.

They also announced a 55-cent quarterly dividend payable April 15th to holders on March 15th which equates to a 4% yield.

Next earnings are April 25th.

After reporting earnings the shares rebounded from a sector downgrade on IP in January. PKG has rebounded from $45 to $54 and could continue higher to as much as $65 before hitting significant resistance.

With recent economic reports suggesting the economy is improving slightly this might be the right time to speculate in companies that will profit from a summer recovery.

Shares dipped slightly on Thursday after hitting as 6-week high on Wednesday. This gives us an opportunity to buy a close to the money option relatively cheaply. There is no entry trigger.

Position 3/11/16:

Long April $55 call @ $2.20, no initial stop loss.

QSR - Restaurant Brands Inc - Company Description


Back to support on no news. Purely market driven.

Original Trade Description: March 7th.

QSR is the new name for the Burger King and Tim Hortons brands. Both have been serving customers for more than 50 years. QSR currently operates more than 19,000 restaurants in 100 countries with more than $23 billion in sales. The name change and rebranding came a year ago when Burger King bought the Tim Hortons chain.

QSR has been flying under the radar for the last year with all the news about McDonalds all day breakfast and Starbucks expanded menu. They reported earnings of 35 cents that beat estimates of 31 cents.

Same store sales rose +5.6% at Tim Hortons and 5.4% at Burger King.

Burger King sales are accelerating because of a flood of new menu items. They have Chicken Fries, which are fries dipped in fried chicken batter and fried. They have Jalapeno Chicken Fries. On February 23rd they introduced the Whopper Hot Dog. This is a foot long hotdog flame grilled and served with whatever you want on them.

Burger King received tons of free press when the new hot dog was delivered. Some food aficionados are calling the hot dog a "culinary calamity." Others called is a "disgusting disgrace" but customers are waiting in line to order them.

Franchisees claim the demand has been "overwhelming" and while only a couple weeks old they are selling over 100 a day and rising rapidly as more customers realize they are available. Americans eat more than 20 billion hotdogs a year.

Earnings are May 27th.

QSR shares are currently $37.85 and a breakout over resistance at $37.65 is in progress. I am recommending we buy the April $39 call, currently $1.10, and plan on exiting at $41 if that higher level of resistance slows the rally.

Position 3/9/16 with a QSR trade at $38.15

Long April $39 call @ $1.15. See portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

SHAK - Shake Shack - Company Description


Nice drop in SHAK to a new 6-week low and the down trend in intact.

Original Trade Description: March 21st.

Shake Shack owns, operates and licenses Shake Shack restaurants in the U.S. and internationally. The currently operate more than 50 domestic stores and 30 international stores. The stock started off with a bang because the majority of their stores in early 2015 were in the Northeast and traders and investors were familiar with the brand. Shares rocketed to a market cap of about $2 billion despite only having about 50 stores at the time.

After topping out at $97 in May of 2015 shares have fallen to just over $30. The bloom is off the rose and the brand has become just another hamburger stand with plenty of competition from stores like Five Guys, an improved McDonalds, an aggressive Burger King, Jack in the Box with its Qdoba Mexican unit, Good Times, Wendy's, etc.

The reported earnings in early March and shares dropped -17% even though they beat earnings and revenue estimates. The problem came from guidance. They forecast same store sales for all of 2016 of 2.5% to 3.0% growth compared to 13.3% growth in 2015. Analysts have lost the love for the SHAK. There are ten analysts that follow the stock. Only one has a buy rating, 7 have hold ratings and 2 have sell ratings. The consensus price target has declined to about $35, which is where it is trading now.

Even worse eight insiders combined to sell more than $30 million in shares last week with officers and directors dumping a lot of their shares. With a PE of -52 the stock is not growing its fundamentals.

Earnings May 12th.

Position 3/22/16 with SHAK trade at $33.80

Long the May $32.50 put @ $2.60, initial stop loss $36.75.

SPY - S&P 500 ETF - ETF Description


The SPY did stall at $205 and opened down this morning. We entered the first portion of this position at the open at $204.

I am recommending we add to this position when/if the SPY trades up to $207 and again at $210.

Original Trade Description: March 16th.

All good things must come to an end. The market appears poised to rally and produce a new leg higher. However, there is serious resistance starting at 2,075 on the S&P and continuing through 2,100. The odds are very slim that a rally will make it through that resistance ahead of the earnings cycle and assuming earnings for Q1 are as bad as the guidance we have been getting then it is even more likely the market rolls over into the "Sell in May" cycle.

Nobody can accurately pick turning points in the market on a routine basis. There are far too many things that can push and pull the indexes but at critical resistance levels we can normally anticipate at least a little reaction to those levels.

The S&P has strong resistance beginning at 2,078, which equates to $208 on the SPY. That resistance runs from 2,078 to 2,105 or roughly $211 on the SPY. I am proposing we buy puts on the SPY starting at $207 with a stop loss at $213.

The S&P may never hit those levels or it could hit them next week. The close after the Fed decision was 2,027, which means it would still have to rally 50 points to hit our initial entry point. Once it reaches that level it will have rebounded for +268 points and would be extremely overbought when it reached that 2,078 level. That makes it even more likely it will fail when it gets there.

I am going to recommend the June $200 puts. They should cost about $4 when the SPY reaches the $207 level. I want to use June because we may not reach that resistance for a couple weeks, if at all, and once we do hit that level I want to be able to profit from any sell in May decline.

This position could go for several weeks without being triggered and there is a good chance we will not get to play it with numerous analysts calling for a failure at 2,040 and 2,050 along the way. There are analysts calling for a retest of the 1,900 level this summer with some projecting significantly lower levels. If you look hard enough you can probably find someone projecting targets a couple hundred points higher or lower than the ones discussed.

Morgan Stanley's Adam Parker slashed his price target for the S&P from 2,175 to 2,050 yesterday. Most of the major banks are in the 2,050 to 2,100 range so the expectations for a major rally from here are pretty slim.

Position 3/23/16 with SPY trade at $204.11

Long June $200 put @ $4.77, initial stop loss $213.

If the market continues higher add to that position at $207 and again at $210.

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