Option Investor

Daily Newsletter, Wednesday, 3/30/2016

Table of Contents

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

Market Wrap

Market Adds to Bullish Reaction to Yellen's Statement

by Keene Little

Click here to email Keene Little
Following the bullish reaction to Yellen's statement on Tuesday there was a rally in overseas markets and that boosted U.S. futures, giving us a gap-up start to the day. While nothing more was added to the gap-up start, it did give us another positive day. Thursday is the end of the quarter so we'll see if the bulls can hang on.

Today's Market Stats

The bullish reaction by the U.S. market to Yellen's comments on Tuesday was a bit strange if you try to analyze it logically (you know of course that a logical stock market is an oxymoron). The reaction told us that investors are happier about not having another 1/4-point rate increase than they are worried about a slowing economy and slowing corporate earnings. Apparently the fact that the Fed is recognizing the global economy is turning south, which will likely put negative pressure on the U.S. economy, is a good thing for stock prices.

The Dow rallied almost 300 points from midday Tuesday, just before Yellen spoke, to this morning's high. If ever you wondered about the disconnect between the stock market and reality, that 300-point rally should have caused you to wonder no more. The Fed's thoughts/actions drive this market more than any fundamental issues and that continues to be a little frustrating for those of us who remember the market before we had an activist Fed. But it is what we trade and we must trade what we see and not what we expect a "logical" market to do.

The one caution about a positive reaction to a Fed statement is that these reactions are having less and less of an effect on the market as the market begins to understand that the Fed and other central banks are simply trying to do more of the same that hasn't worked. If Keynesian economic policies are working the economists will tell you to do more of the same. If the policies are not working the same economists will tell you need to do more of the same to get it to work. Before this is all over those economic theories, which are practiced by nearly all of today's economists, will be completely debunked.

The one benefit of course from all these central bank policies has been asset inflation and that's been good for investors but most are beginning to recognize that the inflated prices will not be able to hold up in the face of a deteriorating economy that's coming off the slowest economic recovery in our history. This recognition is showing up in the shorter-term positive effects from Fed statements and policy changes. My sense is that smart money is trading the trend but they have one foot holding the exit door open so that they can be one of the first out the door when someone yells "SELL!"

It can of course only be speculated about how vulnerable the market is here but I was discussing this same thing at the previous high in December and worried about a disconnect to the downside as sell orders do not get matched up with buy orders. The withdrawal of bids can create a big hole into which many investors and traders fall when trying too late to get out of positions. Limit stop orders can be jumped over and many find out at the end of the day that their stop orders did not trigger. This is a very risky time, again, to be complacent about the long side. It's too late to buy and too early to short but I prefer nibbling short here than trying to hold long and this is especially true now that we've had the ramp up into the end of the quarter.

Last Wednesday I showed some sentiment measures that had moved into bullish extreme territory and while the bullish sentiment has backed off a little, that's actually the first sign of an impending reversal. Oftentimes tops are formed from simply a lack of buyers and other than the fund managers pushing the indexes higher in order to get their higher management fees (higher assets under management, AUM, gives them higher 2% fees), I wonder if the buying pressure will disappear after tomorrow (maybe after the first of April). So the backing off of bullish sentiment is an indication that many investors are no longer buying the rally.

In addition to the sentiment measures shown last week, the VIX option prices are also flashing a warning signal. VIX options are European-style, which means they can't be exercised prior to expiration and it's easier to see distortions between the call and put prices. This in turn provides clues which way traders are leaning. The VIX has dropped back down below 14, which is where it was last October, just before it rallied above 30 into January.

Currently, with the VIX closing at 13.56, the April 14 calls, which are $0.44 out of the money, cost $2.20 (all time premium and for only 20 days). In the meantime, the April 14 puts, which are $0.44 in the money, can be purchased for just $0.25. Traders are willing to pay nearly 10 times as much for an OTM call option than an ITM put option for a bet that the VIX will be higher by April opex. This is a similar pricing situation that we had at last October's low for VIX and it's another similarity between the patterns between last August-November and this January-March. Time, price and sentiment are telling us the bulls are pressing their luck here and bears should soon have a turn at the feeding trough.

I've mentioned in the recent past how close the patterns relate between the August 2015 low and November 2015 high. It was a 3-wave move up from August and the rally from September into the November high lasted 25 trading days. It's been a 3-wave move up from January and the rally from the February low into the March 22nd high lasted 27 trading days. Some of the indexes are now pressing to minor new highs and the next similar timeframe is this Friday, which is 50 trading days from the January low. That was the number of trading days off the August low into the November high. The market doesn't usually repeat exact patterns but if often rhymes, which means the patterns tend to be very close since they're a measure of human reactions and we tend to react the same way to the same stimuli.

With that let's jump into tonight's charts to identify some key levels to watch and where to watch for support and resistance.

Dow Industrials, INDU, Weekly chart

Yesterday's rally brought the Dow right up to its downtrend line from May-November 2015, near 17650, and this morning it gapped up over the line (the way this market likes to deal with resistance and support levels). That was a bullish break and while the Dow wasn't able to add to its initial rally it at least held above the line and that keeps it bullish. If the buying can continue and/or use the broken downtrend line as support on a pullback we could see the Dow challenge its 2015 highs (November - 17978, May 18351). But if the Dow drops back below the downtrend line it would leave a failed breakout attempt. A failed attempt usually leads to a fast reversal so be careful with long positions if the Dow closes back below 17650. Both the bullish and bearish wave patterns call for at least a deeper pullback and only after we see what kind of pattern develops (corrective vs. impulsive) will we have a better sense for which larger pattern is playing out.

Dow Industrials, INDU, Daily chart

The daily chart shows today's break above its downtrend line from May-November 2015 but the pullback from this morning's initial high left a candlestick that looks a little like a shooting star, which could turn into a reversal candlestick if Thursday finishes with a red candle and closes below 17650. It takes a drop below the March 24th low at 17399 before a top will be confirmed in place. In the meantime the bears need to respect the potential for additional upside. But the reverse is also true -- bulls need to be careful that an end-of-quarter run will simply stop because fund managers stop driving it higher (to get their higher AUM in order to maximize their management fees). This is what happened with the run into the end of the last quarter, where the December 29th high was followed by strong selling into January.

Key Levels for DOW:
- bullish above 17,670
- bearish below 17,399

S&P 500, SPX, Daily chart

SPX remains bullish above its March 22nd high, near 2057, but the rally could be in trouble if it drops back below its broken downtrend line from November-December 2015, near 2051. There's upside potential to about 2080-2092 to complete the leg up from March 24th, which in turn would very likely complete the leg up from February. That projection zone is based on the wave pattern for the rally, the December 29th high near 2082 and then a back-test of its broken uptrend line from February, near 2092 by the end of the day Thursday. Above 2092 would target the December 2nd high at 2104 and then the November high at 2116. But a drop back below its March 24th low near 2022 would confirm the leg up from February completed and then we'll have to see what kind of pattern develops for the larger pullback/decline.

Key Levels for SPX:
- bullish above 2057
- bearish below 2022

S&P 500, SPX, 60-min chart

On the 60-min chart below I'm showing an expectation for a leg up Thursday, potentially up to the 2090 area, before completing the rally from February. At that level, by midday on Thursday, the broken uptrend line from February 11 - March 10 crosses the trend line along the highs from March 4-18. It could instead fail from here, stop at the 2080 price projection mentioned above or even continue to rally above 2100 but the completion of a 5-wave move up from March 24th would be a nice completion pattern.

Nasdaq-100, NDX, Daily chart

NDX made a bullish jump over resistance this morning by gapping above its 200-dma and the trend line along the highs from March 4-22, both near 4863, and then above its broken uptrend line from February, near 4875. Following its gap up it completed its rally in the first 15 minutes of trading and then pulled back below its broken uptrend line from February. That leaves a possible back-test and bearish kiss goodbye and any further selling Thursday morning would be a bearish sign. But the bears need to drive NDX below its March 24th low near 4735 to prove the leg up from February has finished. Another push higher Thursday morning would be able to test its downtrend line from December, which crosses its broken uptrend line February near 4902 on Thursday. Above price-level S/R at 4920 would be more bullish.

Key Levels for NDX:
- bullish above 4920
- bearish below 4734

Russell-2000, RUT, Daily chart

The bullish break by the RUT is the rally above its H&S neckline, which is the uptrend line from October 2014 - September 2015 (bold purple line), currently near 1100. But the RUT was the weaker index today and today's candlestick is a potentially bearish gravestone doji and a red candle for Thursday, especially if it closes back below 1100, would indicate a high is probably in place. In the meantime there's bullish potential to its downtrend line from June-December 2015, currently near its 200-dma at 1141.

Key Levels for RUT:
- bullish above 1105
- bearish below 1065

Transportation Index, TRAN, Daily chart

The TRAN again tried to break its downtrend line from March-November 2015, currently near 7965 (log price scale), which is where it closed today. Today's candlestick is a bearish gravestone doji at this line of resistance so the bulls need to prevent a red candlestick on Thursday. The bears need to see a break below its 200-dma at 7823 and then follow that with a breakdown from its up-channel from January with a drop below 7795. Coinciding with a break of its up-channel, if it happens from here, would also be a break of its 20-dma, which has supported the rally since January. There's lots of bullish potential if the bulls can prevent selling this week.

U.S. Dollar contract, DX, Daily chart

Thanks to Yellen's dovish comments on Tuesday the US$ took a nose dive on Tuesday and dropped further today. If the dollar continues to drop to the bottom of its down-channel that it's been in since the December high, it will make it down to about 93 by the end of April where it would meet the top of its old up-channel off the May 2011 low. A closer support level is the top of a parallel up-channel for the rally off the April 2008 low, currently near 94 (bold blue line). The tops of both channels were broken in December 2014 and January 2015 with the big ramp up from May 2014 and you can see how the top of the channel from 2008 has held as support since the March 2015 high. A drop below 93 would be more bearish for the dollar but the corrective pullback since last December suggests the larger consolidation pattern off the March 2015 high will continue for several more months before heading higher, as depicted on my chart (bold green).

Gold continuous contract, GC, Weekly chart

After trying to get above its down-channel that gold has been in since August 2013, currently near 1250, the weekly oscillators for gold has it looking like it will at least pull back further before potentially heading higher. A typical pullback correction would be back to its 50-week MA, currently near 1150. You can see how this MA acted as resistance since gold broke below it back in February 2013. So a drop below the 50-wma would be a bearish signal but until that happens we can't know yet if we'll get just a pullback or a drop down to the bottom of its down-channel, which will be near 2008-2009 price-level S/R near 1000 by the end of July.

Oil continuous contract, CL, Weekly chart

Last week I had pointed out how oil reached the top of its down-channel that it's been in since the January 2015 low. It started a pullback from its March 22nd high and the weekly oscillators are starting to roll over. Similar to gold, it's still very early in its reversal, which could easily be just a small pullback before continuing higher. Above 42 would be more bullish for oil, in which case the next upside target would be its 50-week MA, currently at 44.62. But for now the bearish setup is for oil to drop back down to the bottom of its down-channel, which will be near 21 by the end of June, especially if support near 38 does not hold.

Economic reports

Thursday's economic reports include unemployment claims data and the Chicago PMI, which is expected to improve slightly from February's sub-50 of 47.6 with a climb up to 50.3. Considering all the other signs of a slowing economy I would not be surprised to see a reading below 50 again. But hey, that's good news right? It means the Fed will continue to back off on their threats to raise rates. What a bizarro world in which we trade. The big report will be Friday's pre-market NFP report and that could have Thursday either trading sideways as it consolidates and waits or it could cause some profit taking in front of a potentially risky report. After Friday's open we'll also get the ISM Index, Construction spending and the final number for Michigan Sentiment.


There's been an obvious push to get the indexes as high as possible for quarter-end in a pattern that has often repeated. Fund managers make a push to get end-of-month and especially end-of-quarter settlement numbers as high as possible so that they can maximize their management fees with high AUMs. Once the quarter ends there is less buying pressure supporting the market and in fact there's often liquidation of inventory as those same hedge fund managers hope to sell high and then buy back the stocks at a lower price later in the quarter to do the same thing. The end of last December was followed by a strong selloff into January which then led to a strong rally into March. So maybe selling into April-May and then a strong rally in June?

Yellen's assurance that the Fed is backing away from their plan to raise rates tells us they're more worried now about the economy than they let on in the past six months. I'm not sure how that's bullish and I suspect further indications of a slowing economy will not help the bull's cause. Fed statements are also having a shorter and shorter positive effect on the market. The positive reaction the past two days, with the end of the quarter on Thursday, might be all they'll get.

There's a lot of profit with the extended rally off the February low and at some point soon there's going to be a reason to take profits. Whether that will be in front of Friday's NFP report or if instead it will be the result of some other news can't be known. But in any case the market is vulnerable here to at least some stronger profit taking and with the potential for a more serious decline I think it continues to be a risky time to bet on the upside. The bears already know it's a risky time to bet on the short side (wink) but I think their turn is coming in the next few days if not next few hours.

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

Breakout Pending

by Jim Brown

Click here to email Jim Brown

Editors Note:

What do you do with infected medical waste or several tons of contaminated meat or 20 years of confidential customer records. You call Stericycle.


SRCL - Stericycle -
Company Description

Stericycle provides regulated and compliance solutions to the healthcare, retail and commercial businesses in the U.S. and internationally. They collect and process regulated and specialized waste for disposal as well as personal and confidential records for destruction.

Everyone knows that doctors and hospitals produce tons of medical waste every month and that waste can be infected with all kinds of bacteria and viruses that can be contagious. You cannot just throw those bloody surgical gowns and blankets in the trash. They have to be disposed of in an environmentally safe way.

We also hear all the time about some food company recalling hundreds of tons of a particular food product because it was contaminated with ecoli or some other bad bacteria or foreign substance. Where does that food go? It goes to Stericycle and they dispose of it safely.

In Q4 they acquired Shred-It for $2.3 billion in order to expand into the confidential records destruction business. Stericycle sees Shred-It as an excellent opportunity for cross selling. Less than 20% of Stericycle's current customers use a document shredding service.

In their recent Q4 earnings they reported $1.11 per share that beat estimates for $1.08. However, revenue of $888.3 million missed estimates slightly of $889.1 million. Revenue was hampered by a $26.9 million hit from the strong dollar. Gross margins were 42.9%.

In 2016 earnings are expected to grow +20.3% to $5.26-$5.33 with revenue up +21% to $3.6-$3.67 billion.

Earnings are April 28th.

Shares have crept up to resistance from November at $126 and a breakout here could run to $140 or higher.

With a SRCL trade at $126.75

Buy May $130 call, currently $2.55, initial stop loss $122.65.


No New Bearish Plays

In Play Updates and Reviews

Resistance Test

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P rallied to 2,072 at the open and not quite at the 2,075 resistance but sellers appeared immediately. The S&P closed at 2,063 with a 9-point gain but nearly 10 points off its high. The opening spike was cut in half as the day progressed.

Tuesday's close at 2,055 was contrary to the 2,048 I posted in yesterday's comments. There was an error in my chart program and was showing the wrong number. That 2,055 close was right at the resistance from the earlier rally the prior week. Today's gap open to 2,072 had promise before it faded. We cannot complain about a 9 point gain but given the strong overhead resistance starting at 2,075 it is going to be a fight to move higher.

We did not lose any positions today despite half the stocks finishing with losses for the day. It would be nice to see them all up on the same day but that is not likely.

We were stopped out of CRM yesterday and shares rallied $2 today to a two-month high. That is always frustrating but that is part of investing. We cannot go without the stop losses because it could just as easily have been a $2 drop.

Current Portfolio

Current Position Changes

HCA - HCA Holdings

The long call position was opened at $78.00.

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


No specific news.

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.

Position 3/29/16 with an ADSK trade at $58.05

Long May $60 call @ $2.45, initial stop loss $54.25.

AKAM - Akamai Technologies - Company Description


Still clinging to $55. No specific news.

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


No specific news. Earnings changed from April 29th to 27th

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.

DLPH - Delphi Automotive - Company Description


No specific news. New three month high.

Target $76.75 to exit.

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.

HCA - HCA Holdings - Company Description


Minor gain but still a gain with resistance at $78.50.

Original Trade Description: March 29th.

HCA provides health care services in the USA. They offer general, acute care, intensive care, cardiac care, diagnostic, emergency and outpatient services. They operate 164 general and acute care hospitals with 43,275 licensed beds. They also operate 3 psychiatric hospitals and 116 freestanding surgery centers. They were founded in 1968.

In their Q4 earnings they reported $1.69 per share compared to estimates for $1.39. Revenue rose 6.4% to $10.25 billion also beating estimates for $10.14 billion. They guided for the full year to earnings of $6.00-$6.45 and revenue in the range of $42 billion.

In October, the company had warned on Q3 for the first time since 2013. The entire health care market was shaken by the warning because everyone assumed the revenue and profits would always continue to grow. This is the largest company in the healthcare space and is seen as a bellwether for the sector. HCA rectified the problems by Q4 and the CEO assured everyone on the call that all was well and HCA was "well-positioned for continued success."

One of the problems in Q3 was retaining qualified staff. There is an extreme shortage of nurses and the company has to pay premium wages to keep nurses from being lured away to other hospitals. The CEO said they have a plan in place and they view it as an opportunity for 2016.

Shares sank from the October warning through the market washout in January. After they reported earnings the shares rebounded but were hit again in the February decline. Since the February market lows the stock has risen steadily and has reached initial resistance at $78. Once through this level it could be clear sailing to $86-$88 depending on the market.

Earnings are April 28th.

I am recommending an inexpensive $80 strike for May that should still have some expectation premium left when we exit ahead of earnings. The risk is the resistance at $78.50.

Position 3/30/16

Long May $80 call @ $2.50, initial stop loss $74.75

N - NetSuite - Company Description


Shares spiked to within 40 cents of our exit target.

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


No specific 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


Another strong gain and only $1 below our exit target. No news.

Target $88.85 to exit.

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.

PKG - Packaging Corporation of America - Company Description


Paused after a strong gain yesterday. 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


Moved right to the top of current resistance. No news.

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.

SWHC - Smith & Wesson - Company Description


No specific news.

Original Trade Description: March 26th.

Smith & Wesson was founded in 1852 and manufacturers firearms in the U.S. and internationally under many different brands but primarily Smith & Wesson.

Gun sales are booming. Sportsman's Warehouse said gun sales rose +34% in Q4 alone. With every terrorist attack or mass shooting more consumers rush out to buy guns for self defense. With the potential for additional attacks in the U.S. this trend is not going to slow. However, sales are cyclical. They surge after attacks like San Bernardino or after speeches by politicians about gun control. President Obama has been the best gun salesman we have ever had. Every push by the administration to get more laws passed results in millions of new gun sales.

The New York public advocate, Letitia James created an excellent buying opportunity in a stock that normally refuses to go down. James sent a letter to the SEC demanding they investigate Sturm Ruger (RGR) because their guns are used in crimes. She did the same thing to Smith & Wesson back on December 15th. Seriously? Guns are used in crimes? Who does not know that?

James believes investors in these companies could suffer "reputational risk" if people find out they own shares of SWHC or RGR. She also urged Toronto Dominion Bank (TD) to stop financing the firearms manufacturer. She threatened the bank with the possibly loss of "millions of dollars in contracts" from New York City if they continue to finance gun manufacturers. I wonder if she is going to attack auto manufacturers next for people injured in accidents?

In their Q4 earnings where there was a surge in gun sales after San Bernardino, the company reported earnings of 59 cents that beat estimates for 41 cents. Revenue rose +61% to $210.8 million and easily beat estimates for $182.3 million. The company guided significantly higher for the current quarter to revenue of $210-$215 million compared to estimates for $196 million. Earnings are expected to be 51-53 cents. That is a 13.7% increase in revenue and 20% increase in earnings. For the full year they guided to earnings for $1.68-$1.70 and analysts were expecting $1.42. This was also higher than the company's prior forecasts for $1.36-$1.41 from January.

The company said inventories were depleted because of the high demand and they were focused on increasing production rates to keep up with demand.

Earnings are June 16th.

Shares rocketed higher after the earnings in early March and they were already up strongly since December. I hesitated to buy the top since it was making new highs every week. The hatchet job by James has given us a buying opportunity.

I am recommending a June call because it expires after earnings and should retain some expectation premium when we exit before earnings. Buying a May option would be subject to accelerated premium decay.

Position 3/28/16:

Long June $28 call @ $1.95, no initial stop loss.

BEARISH Play Updates (Alpha by Symbol)

ENDP - Endo Intl Plc - Company Description


No specific news. Heading back to the recent low.

Original Trade Description: March 28th.

Endo develops, manufactures and distributes pharmaceutical products and devices worldwide. The market well known brands including Percocet, Lidoderm, Voltaren and a wide range of pain medications and testosterone replacement therapies.

Shares have declined from $96 last April to $28 today. The acceleration of the decline over the last several weeks has been in reaction to some generic competitors expected to receive approvals from the FDA soon.

The company also lowered guidance at the Barclay's Healthcare Conference on March 15th. The company lowered guidance to revenue of $928-$972 million for Q1 and analysts were expecting $1.03 billion. Earnings guidance was $1.02 to $1.08 and analysts were expecting $1.19.

Endo is also under pressure as a result of the Valeant Pharmaceutical disaster and the overall decline in the biotech sector.

Earnings are May 9th.

Shares have flat lined at the $28.50 level for more than a week and I believe we are about to see another leg lower. Today was the lowest close since January 2013.

Position 3/29/16:

Long May $25 put @ $2.10, initial stop loss $32.50.

SPY - S&P 500 ETF - ETF Description


The SPY rallied to $206.87 at the open and just shy of our next entry point at $207.

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.

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

subscribe now