Option Investor

Daily Newsletter, Wednesday, 4/20/2016

Table of Contents

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

Market Wrap

Bulls Getting Tired But Not Giving Up

by Keene Little

Click here to email Keene Little
There are signs of waning momentum for the rally but all efforts to sell the market are met with renewed buying and the indexes continue to power higher. We have an overbought market that's showing some bearish divergences so it's a good time for bulls to be cautious while the bears chomp at the bit to get started.

Today's Market Stats

Oil powered higher today, up +3.8% for the day (and pushing higher in the after-hours session), and that helped the stock market power higher as well. There was a small but sharp giveback at the end of the day and that looked a little bearish but the buyers are not giving the sellers any play time and that could continue the rest of this week.

There was very little in the way of economic reports but with oil's rally and the selling in Treasuries it helped keep the spark alive in stock market bulls. The charts are showing signs of waning momentum and a slight deterioration in market internals so the rally probably doesn't have much more room to run on the upside. But that doesn't mean the rally will end now and therefore the bears need to continue exercising patience while the bears need to get a little more defensive and protect what they've made. Once the leg up from February completes we should see at least a sizeable pullback into May and potentially something more bearish.

Bullish sentiment has spiked up again, thanks to the strong market rally off the February low. At that low most thought there was no bottom and that we were in the middle of a crash lower. I had suggested at the time that the wave pattern suggested we should be looking for an end to the decline and a big bounce correction to the decline. I did not think we'd see prices recovering the full decline but here we are. Now sentiment has completely reversed and most are feeling there is no end to the current rally and that new all-time highs are coming. That might happen but it's a risky bet here.

Tom McClellan tracks the bullish minus bearish sentiment reported by the Investor's Intelligence report and graphs it with a moving average band around the 50-dma, shown on his chart below. You can see the spikes to the downside (few bulls, more bears) in August 2015 and February 2016, each of which dropped through the lower band and suggested sentiment was getting too bearish. The opposite occurred at the November 2015 high and now currently -- lots of bulls, few bears. The reading spiked above the upper band in November 2015 and led to a turn back down and the same spike up through the upper band is happening currently. The bull-bear spread is now more bullish than it was following the rally off the August decline and is a strong warning to bulls that the rally has produced too much froth.

Investors Intelligence Bull-Bear Spread, chart courtesy Tom McClellan

Another chart of sentiment comes from CNN Money (Fear&Greed) which uses several different sentiment measures and combines them into one reading, which is tracked in the chart below. This index peaked in late March and while price has been pressing higher the sentiment index has not made it to new highs. This could be thought of as bullish, as in there's more bullish sentiment to go. But the bearish interpretation of this is that there are just a few less bullishly inclined investors and as they become a little less sure about the rally they become less inclined to keep buying. Without their support, which is reflected in the weaker market internals shown further below, one could argue that the market is going to run out of buyers soon.

CNN Money Fear & Greed Index, chart courtesy CNN Money

While bullish sentiment, as measured by the two charts above, is begging for a correction we're seeing some market internals that suggest the rally is getting tired. Momentum can only last so long before it peters out and the kind of market we seem to have now is like a light switch -- it's either all bullish or all bearish and when it flips it can quickly reverse the prior move. Certainly the moves since last May's highs bear this out and this kind of volatility is typically seen at major highs. What we can't know is how long it will continue or even if it ended and we're into a new bull market. But even if that's true, nothing goes in a straight line and corrections to severely overbought and overbullish tend to happen quickly.

The series of charts below show SPX at the top, new 52-week highs in the middle and the Advance-Decline at the bottom. The 52-week highs and a-d line have a 10-dma (red) to smooth out the daily spikes and you can see the bearish divergence vs. the new price high off the April 7th low. It doesn't guarantee a reversal anytime soon but it does give us fair warning.

SPX vs. 52-week highs and Advance-Decline line, Daily chart

Dow Industrials, INDU, Weekly chart

The non-stop rally off the February low has the Dow popping above price-level S/R near 18100 (today's high was 18167) but it was unable to close above this level (it closed basically on it at 18096). Above 18100 there's not much resistance up to its May 2015 high at 18351 and it certainly looks like it's acting as a siren call to the bulls right now. But the sharp little selloff in the final hour looks a little ominous so it's going to be important for the bulls to turn it back up right away Thursday morning (for something more than just a bounce correction).

The Dow's rally has also achieved two equal legs for the bounce off the August low for what could be a large a-b-c correction/consolidation before heading back down. The bearish pattern says the a-b-c bounce pattern is a 2nd wave correction following the 1st wave down into the August low. There are a couple of bullish possibilities, the first being the completion of a correction in the longer-term rally at the February low. The current rally would be the 1st wave of what will become a much more bullish run this year. That calls for just a pullback correction into May before heading much higher into the summer. Both the bearish and bullish patterns call for at least a pullback and perhaps something more bearish so it's a good time to be ready for what should be at least a deeper pullback into May. The big question of course is where and when the pullback/decline will begin.

Dow Industrials, INDU, Daily chart

As mentioned above, today's rally achieved two equal legs up from the August low and at the same time hit the top of a parallel up-channel for the bounce off the August low. The rally could go higher but this achievement, and the little selloff in the final hour, says bulls should be careful here. It could press a little higher but I think that's a risky bet The bearish interpretation of the a-b-c bounce pattern off the August low is that the next big move will be a strong decline that takes the indexes well below the January-February lows. Whether the rally will stop here or continue up to the May high at 18351 can't be known yet but with overbought charts (intraday, daily and weekly) showing bearish divergences at recent highs and extreme bullish sentiment it's not a good time to be chasing this higher. If long, just trail your stops close.

I noted on the daily chart below two MA crosses of interest -- back in January and yesterday. When the 50-dma crosses above the 200-dma we have the Golden Cross and when the 50 crosses below the 200 we have the Death Cross. But I'm not sure why anyone actually uses this signal that way since it seems to do just the opposite and use it from a contrarian standpoint. The crosses usually happen near the end of the trend and as you can see on the chart, the Death Cross on January 13th was followed a week later by the January 20th low and now we have a Golden Cross as of yesterday. Will it mean the top of the rally will be within the week?

Key Levels for DOW:
- bullish above 18,120
- bearish below 17,8484

S&P 500, SPX, Daily chart

SPX made it up to within 5 points of its November 2015 high at 2116.48 and it could have its eyes on the prize at its all-time high at 2134 back in May 2015 (Dow 18351 equivalent). We obviously have a bullish market but we have to be very careful as the indexes approach what should be solid resistance with an overbought market that is showing waning momentum. It stays bullish above its uptrend line from February and its broken downtrend line from July-November 2015, which cross near 2092 tomorrow, while a drop below Monday's low near 2073 would indicate a top is likely in place.

Key Levels for SPX:
- bullish above 2117
- bearish below 2073

S&P 500, SPX, 60-min chart

There are a few trend lines/channels to watch closely as this rally extends higher and as mentioned above, an important level for the bulls to hold is the broken downtrend line from July-November, near 2092. Below that level would be a bearish heads up but not until it drops below Monday's low near 2073 would it indicate the deeper pullback/decline has likely started. A drop below 2073 would also be a confirmed break of the uptrend line from February 11 - April 12, currently near 2081. In the meantime I see the potential for this rally to extend higher into the end of the week and maybe the first part of next week before the sell-in-May crowd takes over. The November high at 2116, if not the May 2015 high at 2134, appear to be on the bull's radar screen. But is there enough gas in the tank to climb the last bit of the hill to reach those levels?

Nasdaq-100, NDX, Daily chart

For the past week NDX has been trying to break free of its downtrend line from December, currently near today's closing price at 4540. At today's low it tested its uptrend line from February, near 4524, so that's an important level to hold. A drop below 4524 would be a bearish heads up since that would likely be followed by a close of its April 13th gap up, at 4496, and at that point it would suggest the bigger pullback/decline has started. A trend line along the recent highs from April 1st is currently near price-level S/R at 4600 so that's still upside potential, maybe higher. Above 4600 would open the door to its December high near 4740.

Key Levels for NDX:
- bullish above 4600
- bearish below 4435

Russell-2000, RUT, Daily chart

The RUT made it within less than a point of achieving a price projection at 1148.13 (with today's high at 1147.72) for a 3-wave bounce off its February low where the 2nd leg up is 62% of the 1st leg. That's also on top of the 78.6% retracement of its December-February decline, at 1148.48. The pieces are in place to call a high at any time but obviously we'll need to price to confirm. A drop below Monday's low at 1125 would be the first bearish sign and then below 1100 would confirm the top is in place and we're into at least a larger pullback. If the pullback is choppy and corrective with overlapping highs and lows in the move down (such as a bull flag pattern) we'd then know to look at it as a buying opportunity. But if the decline becomes a sharp impulsive move down then we'd know it will likely drop to new lows and we'd want to short the bounces. It's too early to know and obviously the first thing we need to see is the start of a pullback, something the bulls have not let happen yet.

Key Levels for RUT:
- bullish above 1150
- bearish below 1100

10-year Yield, TNX, Daily chart

Bonds dropped sharply today and that had Treasury yields popping (10-year up +4.0%, 30-year +2.5%) and considering the big move I'm surprised the stock market didn't benefit more. Maybe money freed up from bonds today will flow into stocks tomorrow. TNX has bounced back above its 20- and 50-dma's, where it's been struggling for the past week and this could be part of what will become a larger rally in yields up to its downtrend line from June 2007 - December 2013, near 2.20% by the end of May. If the stock market does start a pullback any day now and pulls back into the end of May before heading higher we could see stocks and bonds in synch instead of counter-trend with each other. But the bearish pattern for TNX says the bounce off the April 7th low is only a correction to the March 16 - April 7 decline and at the moment it's just a 3-wave bounce. If the larger pattern is still bearish, which I believe it is, we'll see TNX continue lower once the current bounce completes (two equal legs up from April 7th is at 1.859 and today's high was 1.854).

KBW Bank index, BKX, Daily chart

After struggling a little with price-level S/R near 66.50 BKX has blasted higher in the past 3 days and now it's testing its 50% retracement of its 2007-2009 decline, at 69.45. A little higher than today's high, at 69.70, is its 200-dma at 70.22. If the bulls can do better than that we should see a rally up to 72.13 (two equal legs up from February) and maybe 72.43 (78.6% retracement of its December-February decline, which crosses its downtrend line from July-December 2015 in the first week of May).

Transportation Index, TRAN, Daily chart

The transports have been showing renewed strength following its pullback into the April 7th low and has now rallied marginally higher than its March 21st high. While the oscillators could catch up, at the moment they're showing bearish divergence so the bulls need to keep price from rolling over and leaving a little double top with bearish divergence. Yesterday's and today's highs challenged a downtrend line from the August and November 2015 highs and while the importance of that trend line is questionable, traders seem to be paying attention to it. The leg up from April 7th can be satisfactorily counted as complete and therefore there is the risk that it will turn back down from here.

U.S. Dollar contract, DX, Weekly chart

The US$ looks like it's either basing near 94 or has one more small drop to about 93 before it will be ready for the next leg up in its consolidation pattern. The decline from its December 2015 high is looking like a bullish descending wedge with bullish divergence since its February 11th low on its daily chart. It's oversold on its weekly chart and is looking like it could start its bounce at any time, either from here or after one more drop to 93.

Gold continuous contract, GC, Weekly chart

Gold has been holding up near the top of its down-channel from 2013, currently near 1250, and from a bearish perspective it's getting ready to roll back over. But I can view the consolidation since February as a bullish triangle, in which case it should continue to consolidate for another few weeks before pressing higher. Another leg up would very likely challenge its 200-week MA, currently at 1327, but then be ready for a larger pullback before continuing higher (or not). Many have jumped on the bullish gold bandwagon (and now silver since it's catching up) but I'm not convinced yet that the rally from December is anything more than an oversold rally in a continuing bear market.

Oil continuous contract, CL, Weekly chart

Oil has broken above the top of its down-channel that it's been in since the January 2015 low, currently near 41, and today it almost made it up to its 50-week MA at 43.59. The weekly chart below reflects tonight's after-hours high so far at 43.99 but since I use the continuous contract, which rolled over today I'm not sure I have the correct prices. In any case it's bullish above 43.60 and it could make a run up to its October 2015 high at 50.92. Two equal legs up from February points to 51.09 so that's an upside target as well. I would guess 50 would also be a psychological line of resistance if reached. As with commodities in general, especially if the dollar is getting ready to rally, this bounce might not hold and it's too early to tell if it's something bullish or just an oversold bounce before heading back down. As long as it holds above its April 5th low at 35.24 it will stay bullish.

Economic reports

Tomorrow's economic reports include unemployment claims and the Philly Fed index before the bell. Other than the Philly index there's not likely to be much of an impact from the reports.


The bulls don't seem to care about how overbought the market is but there are signs of waning momentum so it appears there are a few less believers in a continuation of the rally. This is also reflected in the pullback in bullish sentiment, although the bull-bear spread as reported by Investors Intelligence remains at a nosebleed level above where it was at the November 2015 high. Higher bullish sentiment with a lower price could be considered bearish divergence but it's too early to tell. The important thing to note is that the rubber band has been stretched to the upside just as it had been pulled back at the February low. Beware the snapback.

There is one other piece of information that has often worked as a market timing tool -- my highly proprietary Moon Phase Trading System (MPTS). We have a full moon on Friday and we're within the timing window for a high on a full moon. Be careful chasing this higher but bears need to know we're clearly in an uptrend and any short plays here are attempts to pick a top. Once we see an impulsive (not a 3-wave) decline and especially with a drop below Monday's lows we'll then have a green light for the bears to take their turn at the feeding trough. Only after seeing how the pullback/decline develops into May will we have the clues we'll need to help determine whether it will be a pullback to buy or instead start looking for bounces to short. Keep trades on a tight leash in the meantime.

SPX MPTS daily chart

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

Retail and Consulting

by Jim Brown

Click here to email Jim Brown

Editors Note:

Accenture is very close to breaking out to a new high after consolidating for the last couple weeks from the prior high. We are going to buy that breakout.

L Brands pulled a head fake on us last week when the short recommendation was cancelled after a four-day rebound. We may have the last laugh after shares rolled over to retest the lows.


ACN - Accenture PLC -
Company Description

Accenture provided management consulting, technology and outsourcing services worldwide. It operates in multiple segments including Communications, Media & Technology, Financial Services, Health & Public Services, Product support including supply chain management, Resources including chemicals, energy, commodities and utilities. The company was founded in 1989 and has risen to a $73 billion market cap. Accenture employs about 373,000 people in 120 countries.

Basically, Accenture helps other companies become more profitable. When Mondelez (MDLZ) wanted to improve its margins they called Accenture and implemented their suggestions. The new systems saved $350 million in the first year and is expected to save Mondelez more than $1 billion over the next three years. Accenture does this worldwide for almost any business in any sector.

This week they sold a 60% stake in their Duck Creek Technologies division to private equity firm Apax Partners. The joint venture will accelerate the innovation of claims, billing and policy administration software for the insurance industry leveraging advanced digital and cloud technology. They will invest in Duck Creek On-Demand, a native Software as a Service capability delivered through the cloud. Approximately 1,000 insurance and insurance software specialists will join the new venture. Accenture acquired Duck creek Technologies in 2011.

The key for Accenture is not specifically the Duck Creek venture but the rapidly expanding scope of the company. Nearly every day there is some new press release where they are expanding into new markets and new endeavors. This is what IBM and Hewlett Packard wish they were.

Earnings are June 23rd.

Accenture rallied to a new high in early April at $116.35. Shares paused with the market and consolidated their gains. Since April 8th shares have begun to move back to that high and could breakout at any time. I am recommending we buy that breakout over $116.35 because shares could begin a new leg higher, market permitting. Options are cheap!

With an ACN trade at $116.65

Buy June $120 call, currently $1.30, initial stop loss $113.45


LB - L Brands - Company Description

We tried to play LB on the 13th but shares rallied unexpectedly for three days and I cancelled the play. Shares have since rolled over and are again threatening to collapse. I recommend we try it again.

L Brands operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. Everybody knows of Victoria Secret. They are the premier lingerie retailer in the country. They offer products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, CO Bigelow, White Barn Candle Company and many other brand names. They have 2,721 stores in the USA, 270 in Canada and more than 700 international stores in 70 countries.

Two weeks ago the company said it was cutting 200 jobs and restructuring into three divisions. Those will be lingerie, beauty and the teen brand PINK. The company said it was getting rid of multiple merchandise categories but they did not say which ones. The online business will be revamped and integrated into the main business rather than operating as a separate entity. They plan on reducing promotions and eliminating the catalog. Citigroup said eliminating the catalog could be a nightmare that could have serious repercussions. JC Penny's revived its catalog last year after seeing sales decline after it was discontinued. There is a rumor they are eliminating swimwear, a $500 million a year category. They plan on utilizing the retail space for sports clothing.

The company reported March sales growth of 5% to $1.027 billion. Same store sales rose +3%.

Goldman Sachs downgraded the stock from buy to neutral saying the restructuring and elimination of multiple merchandise lines would impact sales in the short term. Two weeks earlier Credit Suisse cut them from buy to neutral and JP Morgan made the same downgrade last quarter.

Earnings May 18th.

Shares fell off rather steeply ahead of the sales reporting and Goldman downgrade and then hit a seven-month low on the downgrade. Many traders thought it was a buying opportunity and shares rebounded promptly in last Tuesday's short squeeze. The rebound lasted four days and now the negative trend has returned.

I am recommending we buy a put on a trade under today's low at $77.25. If the stock continues to decline it will trigger the position, otherwise we are just watching. If shares fall below that $76 print from April 12th there is a lot of air before the next support at $65.

With a LB trade at $77.25

Buy June $75 put, currently $2.00 Initial stop loss $81.05.

In Play Updates and Reviews

Dip, Rebound, Fade

by Jim Brown

Click here to email Jim Brown

Editors Note:

The indexes dipped at the open but recovered on a late day bout of short covering in oil prices until sellers appeared at the close. The Dow dipped to 18,031 at the open before rebounding to trade at 18,167 in early afternoon with a triple digit gain. That faded at the close with the Dow selling off to close at 18,096 and -70 points off the highs.

The S&P-500 dipped to 2,096 at the open and then rallied to 2,111 before falling back to 2,102 and a gain of only +1 point. The Nasdaq only gained 7 points for the day with a similar trajectory.

Are we nearing a top? Both the major indexes are reaching for new highs but the excitement level was lackluster. The key will be what happens next week. The initial earnings this week from the bluest of the blue chips could keep the rally alive for several more days but once the rest of the S&P begins reporting next week the earnings news is not going to be as positive.

The market is over extended and due for a rest. The minor pause to consolidate early in the month was not enough to really equalize the rebound pressures but it was enough to produce another leg higher. There will be increasing selling pressure as the indexes get closer to their old highs.

Current Portfolio

Current Position Changes

XBI - Biotech ETF

Close the long call position at the open on Thursday.

HCA - HCA Holdings

The long call position was stopped on an opening dip to $78.45.

BBBY - Bed, Bath, Beyond

The long put position was stopped with a spike to $48.55.

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

ADBE - Adobe Systems -
Company Description


No specific news. Minimal loss from Monday's new high.

Original Trade Description: April 4th.

Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content.

For years they sold their Photoshop software and assorted tools as boxed software on a CD with a license key. Once you bought it you own it and Adobe never received any further revenue unless you upgraded to a newer version at some later date.

All that has changed with the move to the cloud. The new product is called the Creative Cloud and is a subscription based product where you pay and pay and pay for as long as you continue to use it.

Moving to the cloud model has a lot of inherent problems. Once you quit selling your boxed software that big chunk of retail revenue goes away. In the case of Adobe their software sold for many hundreds, if not thousands of dollars. That meant the one time revenue disappeared in exchange for a $19 to 49 a month subscription fee. Over the long term the revenue is stable and eliminates the volatility of the single sale model.

Earnings for the quarter reported in March were 66 cents that beat estimates for 61 cents. Revenue rose 25% to $1.38 billion also beating estimates for $1.34 billion. They signed up a whopping 798,000 new subscribers to the Creative Cloud suite service. They guided for earnings of 64-70 cents for the current quarter and above analyst estimates for 65 cents.

Earnings are June 21st.

Shares spiked to $98 on the news before pulling back to consolidate at $92 for over a week. Over the last several days they crept up to $96 and then sold off in the weak market on Monday. I believe this market weakness is a buying opportunity for Adobe.

I would like an entry point closer to $92 but there is no guarantee we are going to get it. The S&P futures are down hard tonight at -6.50 and the market is likely to open lower on Tuesday. I am suggesting we buy the option 5 min after the open. That will give the prices time to evaporate in a falling market. Hopefully ADBE will gap down a couple dollars.

Position 4/5/16

Long May $95 call @ $2.48. See portfolio graphic for stop loss.

CSC Computer Sciences Corp - Company Description


No specific news. Still stuck in the Twilight Zone of resistance at $33.

Original Trade Description: April 6th.

CSC is an information technology and professional services Fortune 500 firm that provides solutions in North America, Europe, Asia and Australia.

On February 11th the Supreme Court of Victoria, Australia, approved the acquisition of WXC Limited for (AU)$427.6 million. CSC believes the acquisition of UXC will strengthen their global commercial business by adding the UXC platform to the CSC cloud, cyber and big data offerings. Back in August CSC acquired two other companies, Fruition Partners, a service-management technology provider and London-based Fixnetix, a provider of front-office managed trading software for capital markets.

They are also acquiring Xchanging, a UK company that provides software and outsourcing services for the insurance industry for $697 million. That deal is currently going through the regulatory approval process.

The point here is that CSC is a leading provider of information technology and they are growing rapidly through acquisitions. They are moving towards a mix of cloud based higher margin products that will be beneficial over the long term. They are also buying back stock with a new authorization in January. They paid a special dividend of $10.50 when they spun off the public sector business in Q4. That accounts for the $10 drop in the stock price at the end of November.

Earnings for last quarter were 71 cents that beat estimates for 69 cents. However, revenue declined -10.2% to $1.75 billion missing estimates for $1.859 billion. Shares fell to $24 on the news. However, the reduced revenue came from a switch to cloud products, which have a long term subscription revenue rather than a short term one time sale. Adobe had the same problem when they went from software sales to software as a service. There is always a drop in revenue during the switch but long-term revenue rises and is more stable.

Total company bookings rose +21% to $2.7 billion. Operating income rose +9.2% to $190 million.

Earnings are May 17th.

Shares rebounded from that post earnings low in February to pass resistance at $33 last week. The market decline this week took some of the bloom off the stock and deflated the option premiums. Prior resistance became support and shares started to tick higher on Wednesday afternoon. This is a relatively slow mover but it has been steady since the rebound began.

I am recommending a June option but we will exit before earnings in May. Using a June option the premium will still have some earnings expectations premium when we exit.

Position 4/7/16:

Long June $34 call @ $1.50, see portfolio graphic for stop loss.

EXP - Eagle Materials - Company Description


No specific news. Excellent move with a $1.27 gain to a new six month high. Initial resistance now $75.90.

Original Trade Description: April 14th.

Eagle Materials Inc. manufactures and distributes Cement, Gypsum Wallboard, Recycled Paperboard, Concrete and Aggregates, and Oil and Gas Proppants from 40 facilities across the US. Eagle is headquartered in Dallas, Texas.

In the last quarter revenues declined -5% and earnings -12% to 93 cents. However, cash flow from operations increased +66% to $108.7 million.

There were two problems impacting EXP results. The first was the dramatic decline in oil well drilling. They supply cement for those wells and they use a lot. The slowdown in the sector has weighed on EXP for the last year. However, they have survived and they are doing well.

The second problem was a high volume of rain October and December that reduced sales volume by delaying and slowing construction projects that use EXP materials.

Cement, concrete and aggregates revenue rose 11% in the quarter thanks to a 4% increase in prices to offset the lower demand for oil well cement. Cement revenues alone rose +9% to $135.4 million. They delivered 1.2 million tons at an average cost of $97.10 a ton.

The rain caused sheetrock sales to decline 9% but missed revenues will likely be pushed into Q1. They sold 568 million square feet of sheetrock, which is actually called Gypsum wallboard. They raised prices on that product as of March 31st and they expected a surge in bulk purchases ahead of the price increase. That will show up in the current quarter numbers.

Oil anf gas proppant sales declined 73% because of the slowdown in drilling and fracking. Fracsand volumes declined -47%. Proppants are a minor part of company revenue at only $8.5 million in Q4 compared to total revenue of $277.4 million.

Earnings are May 12th. We will exit before earnings.

Standpoint Research initiates coverage at accumulate and BB&T Capital upgraded them from hold to buy.

As we move into spring the construction activity will surge along with demand for concrete and sheetrock. Earnings should have improved for Q1 and will likely be much stronger in Q2 because of the activity and price increases.

Shares have rebounded to resistance at $71.50 and the close today was slightly over that level. I believe EXP is going to breakout and possibly run to the $77-$80 level before earnings, market permitting.

Position 4/15/16 with a trade at $72

Long May $75.00 call @ $1.95, see portfolio graphic for stop loss.

FDX - FedEx - Company Description


No specific news. New six-month high close on Tuesday.

Original Trade Description: April 18th.

FedEx provides transportation, e-commerce and business services worldwide. I doubt there is anyone that does not already know what FedEx does so there is no need of a lengthy explanation.

FedEx operates 65,000 vehicles and trailers from a network of 370 service centers. By comparison Amazon is operating 20 planes but they are adding hundreds of trucks to move products between regional warehouses. After Amazon contracted for those 20 planes the analyst community was all worried that Amazon was going to create its own delivery service and kick FedEx and UP to the curb.

The FedEx CEO, Mike Glenn, called the rumors "fantastical" and said it would take years and tens of billions of dollars in order to build sufficient scale and density to even replicate some of the existing FedEx network." Glenn said Amazon is "supplementing" FedEx with their new push into moving product around the country. However, Amazon has no real interest in delivering that last mile to customers all across the country. Amazon is simply improving their capability to get vast numbers of packages to the UPS/FDX locations all around the country to reduce costs and improve delivery times. UPS/FDX will still be responsible for delivering each of those packages to the customers.

When FDX reported earnings in March they reported $2.51 compared to estimates for $2.34. That was up from earnings in the comparison quarter of $2.03. Revenue rose from $11.7 billion to $12.7 billion. The company raised guidance for the full year from $10.40-$10.90 to $10.70-$10.90. The analyst consensus estimate was $10.56 on revenue of $49.91 billion. Shares soared from $145 to $161 on the report.

After moving sideways for over a month, the shares are starting to tick higher. There was resistance at $165 and that broke late last week. I am recommending a $170 call with expectations FDX will try to make a new high over $180, market permitting. Oil prices are not expected to move much higher so that is a positive for future expenses.

Earnings are June 21st.

Position 4/19/16:

Long June $170 call @ $3.68, initial stop loss $162.50

HCA - HCA Holdings - Company Description


No specific news. HCA dipped at the open to $78.06 and stopped us out at $78.45 before rebounding back over $80.

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

Closed 4/20/16: Long May $80 call @ $2.50, exit $1.82, -.68 loss.

XBI - SPDR Biotech ETF - ETF Description


The Biotech Index is starting to fade at resistance of 3,250. I am recommending we close this position for a minor profit rather than wait for a dip that takes us into a loss.


Original Trade Description: April 2nd.

The S&P Biotech ETF attempts to match the performance of the Biotech Select Industry Index. The ETF holds 90 stocks in the biotechnology and pharmaceutical sector.

The biotech sector has been in free fall since its high last July at 4,400 on the $BTK Index. The index hit 2,575 in early February and rebounded to trade in a narrow range between 2700-3000 for the last two months. On Friday, the index closed at 3,037 and a two-month high. The rebound over 3,000 could be the beginning of a major breakout.

Biotech and pharma stocks have beenunder pressure because of attacks by political candidates claiming they would lower the prices on drugs if they are elected. This caused the sector to collapse most notably in January from 3,900 to that 2,575 level.

If a candidate is elected and did choose to follow through on a promise to lower drug prices it would take a long time, assuming they had the votes in the House and Senate to get a bill passed. I believe the selloff in the biotech sector has been overdone and I have been waiting for a sign there may be a rally in our future. The close over 3,000 on the $BTK could be that sign. The $BTK gained 5.7% last week suggesting buyers are returning.

The XBI gained 2.9% on Friday to cap off a week of gains. The ETF has resistance at $54 and again at $56.50. However, short interest in biotech stocks is so high that any further move higher in the $BTK could cause significant short covering.

I am recommending we buy the June $55 call, currently $3.40. If we get a breakout over $56, it could easily run to $70, which is significant resistance. Obviously that assumes a positive market as well.

A rebound in the biotech sector would lift the Russell 2000 and the S&P and that would help support a positive market.

Position 4/4/16

Long June $55 call @ $3.50, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

BBBY - Bed, Bath & Beyond - Company Description


No specific news. Gap up at the open to $49.12 stopped us out at $48.55.

Original Trade Description: April 11th.

BBBY operates a chain of retail stores selling a range of domestics merchandise for bedrooms, bathrooms, kitchens and home furnishings. They also offer health and beauty aids, giftware and infant and toddler merchandise. The currently operate 1,530 stores.

In the age of Amazon can a retail store still exist and be expected to grow their profits? The company posted earnings of $1.91 compared to estimates for $1.80. Revenue of $3.42 billion also beat estimates for $3.38 billion. For the full year they reported earnings of $5.10 and revenue of $12.1 billion.

On the surface that would appear to be a great operation. Revenue increased 2.4%. In the year ago quarter they reported earnings of $1.80. However, same store sales at 1.7% were below the 3.7% increase in the comparison quarter. Online sales increased 25%. They repurchased $1.1 billion in stock in 2015 and declared their first ever dividend of 12.5 cents along with the earnings report. This would seem like a recipe for a rising stock price.

Unfortunately, the post earnings spike of 6% lasted about 2 hours and shares closed negative. BBBY has been in a long-term decline and the February rebound was already fading when the earnings were announced. Analysts believe Amazon will eventually spell the end of profits for large retail chains like BBBY.

Earnings are July 6th.

Shares closed at a six-week low on Monday, only two days after the earnings beat. The chart suggests the stock is going back to the January lows at $41 with today's close at $46.

With the retail sales report on Wednesday likely to disappoint we could see an acceleration in the downward trend.

Position 4/12/16:

Closed 4/20/16: Long May $45 put @ $.98, exit .35, -.63 loss.

HRB - H&R Block - Company Description


Nearing a new low. No specific news.

Original Trade Description: April 13th.

H&R Block has been doing taxes since 1946. They provide tax preparation, banking and other services to the general public through a system of retail offices.

Unfortunately for HRB the times are changing. The general public is moving to do-it-yourself tax preparation software like Turbo-Tax from Intuit (INTU). That is not the biggest problem. On Wednesday Senator Elizabeth Warren introduced the "Tax Filing Simplification Act of 2016" and Bernie Sanders is a co-sponsor.

Donald Trump, Ted Cruz and John Kasich have all said they would drastically change the tax code and Ted Cruz wants to simplify it enough so that all your taxes can be submitted on a post card sized form. If a republican wins the election the tax preparation business is going to suffer. However, if Hillary wins she has proposed 18 new taxes to raise $1 trillion in new revenue. That will further complicate the preparation situation.

Obamacare has also made tax preparation harder and more complicated. Taxpayers have been forced to use accountants to prepare their forms because of the complications. HRB could do it but the perception is that you need somebody other than a part time tax preparer to give you the right advice.

In the last quarter HRB posted a loss of 34 cents that was larger than the analyst estimates for 26 cents. It was also larger than the 13 cent loss in the year ago quarter.

Revenue declined -6.7% because of lower volumes of clients. Revenue of $474.5 million missed estimates for $505 million. Tax preperation fees declined -4.2%. Operating expenses rose +1.7%. Long-term debt rose from $500 million to $2.6 billion. Cash burn rose from $1.2 billion to $1.4 billion.

Earnings are June 8th.

I am recommending a July option so there will still be some earnings expectation premium left when we exit before earnings.

Position 4/18/16:

Long July $23 put @ $1.10, no initial stop loss.

SPY - S&P 500 ETF - ETF Description


Dead stop at $211 and retracement to close with only a 20-cent gain. This is what I would expect to see but there is still no decline yet.

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

3/23/16: Long June $200 put @ $4.77 with SPY trade at $204.11
4/01/16: Long June $200 put @ $3.26 when SPY traded at $207.

4/19/16: Long June $200 put @ $1.95 when SPY traded at $210.
See portfolio graphic for stop loss.

TWTR - Twitter - Company Description


Twitter posted a decent gain after Queen Elizabeth said she was looking to hire an official Tweeter to maintain her official social media presence.

Original Trade Description: April 9th.

Twitter operates as a global platform for public self expression and conversation in real time. I am pretty sure everyone knows what Twitter is so I am not going into depth in this explanation.

Twitter has become the bet of the year. Analysts either think it is going to single digits or going to the moon. The highest price target is $36 and the lowest is $11 with the average at $20.86 across a total of 27 brokers.

Twitter has trouble keeping users because the learning curve is steep and Twitter spam is increasing daily. Twitter bots can be programmed to spread tweets and make it appear there is a huge volume of interest in a specific subject. Andres Sepulveda, a Latin American political operative used custom software to direct 30,000 Twitter bots to create false enthusiasm for candidates and spread rumors about the opposition. Sepulveda said the tactics gave him "the power to make people believe almost everything." The man responsible for his operations said two American presidential candidates had contact him and one of those was Donald Trump.

Unfortunately, Twitter has been having trouble monetizing all the traffic regardless of whether it is real or fake. Their monthly active users include a lot of churn and barely any growth. While nobody expects Twitter to go out of business they are losing faith in the business model.

CEO Jack Dorsey is also CEO of Square and that carries mixed emotions. Some want him replaced and others want him full time. Almost nobody wants him to continue the dual role.

There are constant rumors that Twitter will be bought by someone like Google or Apple. If that were to occur it would carry a huge premium to the current $16 stock price.

Twitter has been earnings challenged for a long time and the stock has declined from $55 to the current $16 level on a lack of confidence they will turn the company around.

Earnings April 26th.

The stock is either going to single digits or it will be back well over $20 soon. It is not likely to continue moving sideways at $16.

I am recommending we do a strangle on Twitter using the June options. Regardless of the stock or market direction we should be able to profit. Because Twitter is $16 and stagnant the options are relatively cheap. I want to buy them now and hold over earnings because that is likely to be a volatility event. We could also get some market moving news with the earnings release.

You could use the $18 call and $15 put for a net debit of $2.22 if you want a cheaper option.

Position 3/11/16

Long June $17 call @ $2.07, no stop loss.
Long June $16 put @ $1.45, no stop loss.
Net debit $3.52.

USO - US Oil Fund - Company Description


Short covering continued to push WTI futures higher ahead of futures expiration at the close today. The short interest was very high going into the Doha meeting and all those shorts had to be covered. It may take another day or two for the short squeeze to fade in the June futures.

Original Trade Description: April 12th.

The U.S. Oil Fund is designed to track the daily price movement of WTI crude oil. This is the simplest method to speculate on the direction of crude oil on a short-term basis.

The USO, or any futures ETF, should not be held long-term because it bleeds value when the futures roll over once a month. On a short term basis it works great for speculation.

Crude oil has spiked 15% over the last several days with a 4% rise today alone. This is speculation over a production freeze agreement in Doha, Qatar on Sunday between OPEC and major crude producing countries. On Tuesday Russia's Interfax news service quoted some diplomat in Qatar saying Russia and Saudi Arabia had agreed to freeze production even if Iran decided not to participate.

This is contrary to what the Saudi deputy crown prince has said over the last couple weeks. The prince said Saudi would not participate unless Iran and the other major producers all agreed to freeze production. Obviously, he could change his mind but after making those statements more than once a change of heart could make him look weak.

There is significant potential for a Doha disaster where the meeting deteriorates into a brawl and nothing is accomplished. Even if they do agree to a freeze that would still maintain 1.45 mbpd of excess production at current levels. Iran, Libya, Kuwait, Iraq, Nigeria and the UAE all have plans to increase production so it would be a major change of plans to agree to a freeze. Most have said they would not support a freeze but when it comes down to the meeting, anything is possible.

Lastly, OPEC members are notorious about saying one thing and doing another. They could all agree to the freeze, wink wink, in order to lift prices and then continue on doing what they are already doing and pumping every barrel they can produce.

I believe there is a good probability we will see oil prices significantly lower in the days/weeks following the meeting. I am recommending we buy an inexpensive put on the USO and see what happens. If you are aggressive you could also buy a call just in case a miracle does occur and prices spike higher. I view that as nearly impossible since Saudi Arabia has said they do not want to see prices much over $40 because that would allow U.S. shale drillers to increase production.

Position 4/13/16:

Long May $10.50 put @ 58 cents. No stop loss.

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