Option Investor

Daily Newsletter, Monday, 5/2/2016

Table of Contents

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

Market Wrap

Sell In May, Not Today

by Thomas Hughes

Click here to email Thomas Hughes


Today was a surprisingly calm Monday after last week's selling but there is a storm of data and earnings on the horizon that could bring volatility back. This week's calendar is full of potential market movers that will no doubt fuel FOMC/rate hike speculation and earnings outlook. There are more than 120 earnings reports on tap and a dozen important macroeconomic announcements that will give color to weak GDP readings and the potential for growth in the 2nd quarter. As it stands, indications for growth remain weak, and those for earnings growth continue to weaken.

Asian markets took a big hit in today's action in a delayed reaction to the sell-off in US markets last Friday. The Japanese Nikkei led with a drop of -3.10%, compared to a drop of only -1.5% for the Heng Seng, that was amplified by a stronger yen. The yen fell to a new low versus the dollar and the euro, raising the question of what the BOJ may be able to do, and if they will do it, at the next meeting. In Europe trading was mixed and basically flat. The DAX meandered for most of the day, closing with a gain of about 0.85%.

Market Statistics

Futures trading indicated a lower open during the earliest portion of the electronic session. They slowly crept higher during the morning as it became obvious Asian selling was focused in Asia, and specifically Japan. By 9AM the market was indicated to open flat and by the opening bell were slightly higher. The market moved higher when the open sounded, the SPX gaining an immediate 2 points and then slowly drifting higher. By 10:15 the index was testing resistance near 2,075, failing to break it, and by 11:15 had retested it and failed again. By 12:15 the market was moving lower and near the midpoint of the daily range. This level turned out to be the trigger for buying and sparked a rally. Afternoon trading saw the indices move back to test the high of the day, break it, move higher and close near the highest level of the session.

Economic Calendar

The Economy

Two economic releases today, both consistent with slow sluggish recovery but recovery nonetheless. The ISM Manufacturing Index fell 1% to 50.8%, the 2nd month of expansion after 5 months of contraction but weaker than expected. Analysts had been expecting a smaller drop of only -0.4% to 51.4. This signals the manufacturing economy is expanding, the report says 11 of the 18 sub sectors are reporting growth. Within the report indications are mixed with positive bias. I say positive bias because most sub-components are either positive but shrank from last month or are negative but on the rise and close to the expansionary 50 level; New Orders fell -2.5% to 55.8, Production fell -1.1% to 54.2 and Employment rose 1.1% to 49.2. The only exception is Inventory which contracted to 45.5 from 47.

Construction spending rose by 0.3%, half the expected 0.6% expected by economists. Growth was weaker than expected but positive upward revision, the highest level of spending and an 8% year over year growth rate but a little bullish spin on it. Not all sectors are showing growth, public spending fell nearly -2%, and a few are doing very well. Office construction spending is up more than 25% year over year.

Tomorrow, auto sales will dominate the economic front. Wednesday will be the ADP Employment report, Productivity, ISM Services and Factory Orders. Thursday is weekly jobless claims, the Challenger report on planned lay off's and then on Friday the much anticipated Non-Farm Payrolls, Unemployment and Hourly Wages release.

Moody's Survey of Business Confidence continues to rise. The index gained 0.2% to hit 34.1, the highest reading since November. The index shows that business confidence continues to recover in the wake of global financial market instability at the beginning of the year. According to Mr. Zandi the US is the strongest and the EU is firm. South America is the weakest due to political instability. Despite the gain sentiment remains well below all time highs set last year.

According to FactSet 62% of the S&P 500 has reported earnings with another 124 expected this week. Of those 74% have reported EPS above expectations and 55% have beaten revenue expectations. The blended rate of earnings growth for the 1st quarter is now -7.6%, better than last week's -8.9% and the lowest level decline since late February. This is due to better than expected performance in 6 sectors, led by consumer discretionary. Energy remains the laggard, currently posting a -107.7% year over year earnings decline.

First quarter earnings are better than expected but that was expected. The bar is set very low and there is an historical +4% rise in the blended rate between the start and end to the season. That being said we could expect to see 1st quarter earnings in the range of -4% to -5%, the 4th quarter of decline and the largest decline since the earnings recession began. Looking forward growth is still expected to return in the 3rd quarter but even that is now in question. All three remaining 2016 quarters have been revised lower; the 2nd to -4.4%, the 3rd to 1.6% and the 4th to 7.5%. Full year 2016 projection is now only 0.8%. Projection for 2017 remains stable at 13.7%.

The Dollar Index

The dollar continues to weaken versus the major world currencies. The Dollar Index fell a half percent today to touch the $96.62 support target and complete a full retracement of the 18 month trading range. Today's action leaves the index moving lower toward support with bearish indicators, suggesting that support will be tested and new lows may be seen. A break below the $96.62 level would mark a major shift in fundamental outlook and could take the index much lower. This shift could be underway as the FOMC shifts into rate hiking mode and other central banks are at the end or nearing the end of loosening. The Treasury Department issued a statement outlining how 5 countries including Germany and Japan that were being watched for potential currency manipulation.

The Oil Index

Oil prices took a hit today as a new report shows that OPEC and non-OPEC production is on the rise. According to the report OPEC production reached 32.64 million BPD, near the recent record, and Russian production also rose. This is even after the so-called effort to curb production and only adds fuel to my personal conspiracy theory; that the Saudi/OPEC/Russia intentionally talked up the price of oil on speculation of production curbs. The output increase overshadowed another drop in the active US rig count and caused WTI and Brent to both fall about -3%. WTI ended the day below $45.

The Oil Index fell about -1% intraday, the third day of declines since hitting a peak last week. Today's action helps to confirm resistance at the 1,175 level but does not indicate reversal. The indicators are also consistent with resistance, rolling over into bearish crossovers, but support is still present as well. It looks like a move down to support may be coming, dependent on oil prices, with a target near 1,120. This is a previous support line that is now confirmed by the short term moving average. A break below this level would be bearish for the near to short term and could take the index down to 1,000

The Gold Index

Gold prices surged on dollar weakness and hit a new 16 month high, touching above $1300 intraday. The move was met by some resistance which held the advance at bay. Weak GDP and economic data in general, along with today's Treasury Department statements and recent inaction from the ECB/BOJ has left the door open to gold's advance. A floor in easing in EU and Japanese markets with a pause to tightening in ours means weaker dollar and stronger gold. The risk this week is the economic data, if it is just like Goldilocks likes, not to hot and not too cold, gold could continue higher.

The gold miners opened higher along with gold but soon fell prey to profit taking. The index crested the $26 level for the first time in over a year, and has risen more than 100% in the last three and a half years, creating an attractive opportunity for profit taking. Today's action is a sign that more selling should be expected, the question now is whether the market will consolidate at this new high or retreat. If gold prices do not hold current levels and the index retreats first target for support is near $22.50. However, if the ETF remains at this level and consolidates above $25 a move up to $27.50 is very likely.

In The News, Story Stocks and Earnings

Sysco reported earnings before the bell and proved they don't need US Foodservice to grow. The company beat top and bottom line expectations on improved margins and organic case growth. Execs see favorable trends in the industry and expect momentum to continue into the coming quarters. Shares of the sock jumped more than 5% on strong volume and are now trading at a new all time high.

Texas Roadhouse reported earnings after the bell. The restaurant chain reported EPS of $0.50, slightly below consensus, but was able to produce decent results. Comp sales are up more than 4%, margin is up 116 bps and earnings are up nearly 10% from last year. Shares of the stock had been rallying all day, gaining about 3% in the open session, and then move higher in after hours trading.

AIG also reported after the bell. The long troubled insurance giant reported $0.65, well below the expected $1.00, and sent the stock crashing in after hours trading. Results are roughly half what the company earned in the first quarter of last year driven by volatility in investment portfolio, normalized ROE increased by 110 bps. Shares of the stock fell more than -3% on the news.

The Indices

The bulls started off a little shaky but eventually built up a head of steam, enough to move the market higher. Volume was low, perhaps due to the avalanche of data due out this week, so how far the move will go is questionable. Today's action was led by the NASDAQ Composite which closed with a gain of 0.88%, near the high of the day. The tech heavy index created a medium sized white candle, not overly strong or weak, with little to no shadows. Price action helps confirm support at 4,750 but with the short term moving average just overhead support may be tested again. The indicators are weak, bearish and consistent with a test of support. If the index continues to bounce the short term moving average is first target for resistance.

The S&P 500 made the second largest gain in today's session, about 0.78%. The broad market created a medium bodied white candle, moving up from the short term moving average, that met resistance at the 2,080 level. The indicators are consistent with a test of support within an uptrend so this bounce could continue although they persist in divergence and show a weakening market. If the bounce continues first target for resistance is 2,100 with a possible break to the upside. If so next resistance is just above 2,100 so the run will likely be short.

The Dow Jones Transportation Average gained 0.66% coming in just ahead of the blue chips. The transports created a very small white bodied candle, more a spinning top than anything else, sitting directly on the short term moving average. While the first two indices appear to be bouncing from support this one appears to be pondering a move lower. The indicators support such a move, both divergent from the latest high bearish and pointing lower. A move below support could take the index down to 7,750 or 7,500 in the near term.

The Dow Jones Industrial Average gained a little shy of 0.66% in a move that appears to be a bounce from support. Today's action continues a bounce which began last Friday but there is little strength in the move. Volume was low, adding to weakness, and the indicators persist in divergence. Both MACD and stochastic are pointing lower suggesting a further testing of support is likely. Support appears to be just below today's opening level, near 17,600. If the bounce continues first target for resistance is 18,000, only 110 points higher.

Earnings outlook has not bottomed, it is in fact sill in decline and could continue to do so. First quarter earnings are negative and will stay negative, we know this. Second quarter projections were supposed to be positive, as recently as December, but they have declined to the point they are likely to remain negative through the end of the next season. Third quarter projections are falling and could easily turn negative within the next few weeks, dragging the earnings recession on to a fifth and possibly sixth quarter. Even if the fourth quarter sees earnings growth, growth for the year could be negative.

Between declining earnings expectations, weaker than expected data and weakness in the charts I can't help but maintain a near term bearish stance. Long term trends remain positive, there is growth in the economy and it growth will return to earnings, but the near and short term trends are troubling. I remain bullish for the long term, into the end of the year, but as cautious and wary as ever for the near. I expect a correction, it may not come, but better to be safe than sorry.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Sunshine Failure

by Jim Brown

Click here to email Jim Brown

Editors Note:

First Solar beat on earnings but missed on revenue and a sudden departure of the CEO called future results into question. Changing government regulations also clouded the outlook.


No New Bullish Plays


FSLR - First Solar -
Company Description

First Solar provided solar energy solutions worldwide through two segments. Those are components and systems. The component segment produces the actual solar modules that convert sunlight into energy. The systems segment produces the infrastructure to combine those panels into working systems that are sold to corporations, governments and utility companies.

The company reported earnings of $1.06 that beat estimates for 93 cents. Revenue of $848 million rose 3% but missed estimates for $958 million by a mile. The company blamed the shift to a lower priced module for the decline in revenue. Another factor was the decision by the government to extend the Investment Tax Credit (ITC) another five-years on solar installations. This caused some companies to postpone plans that were being rushed to take advantage of the ITC. Now they have time to think the plans through and make calm decisions. The number of urgent sales declined.

The company refined its guidance positively to revenue in the range of $3.8-$4.0 billion and earnings up from $4.00-$4.50 to $4.10-$4.50. The minor increase in guidance did not excite investors.

With the earnings the company also announced CEO Jim Hughes had resigned and CFO Alexander Bradley would be his interim replacement. Hughes had successfully rescued First Solar from a crisis in 2012 when polysilicon prices were crashing Today the company's panels are close to multi-crystalline. The sudden departure of a hero caused some investors to flee the stock.

Earnings August 2nd.

Shares have fallen significantly since the Thursday earnings but show no indications the drop is slowing. The entire solar sector is in distress since the SunEdison (SUNE) filed bankruptcy a couple weeks ago.

I expect the decline to continue with initial support at $52.50 but longer term support well below at $40. The transformational issues of the ITC extension and the CEO resignation could linger for several weeks.

Buy June $52.50 put, currently $2.16, no initial stop loss.

In Play Updates and Reviews

Minor Rebound

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq shook off the multi-week lows from Friday at 4,750 to post a decent rebound. It was touch and go until noon when a buy program hit and shares spiked sharply higher. The Nasdaq spiked 37 points starting at 12:30 and only gained +42 for the day. That should give yo some idea about the short covering triggered by that buy program.

The S&P stalled at 2,070 until the 12:30 program and then spiked another 11 points on short covering. The S&P only gained +16 for the day.

The rebound left the S&P at 2,081 at the close with strong resistance at 2,100. The Dow added 73 points after 12:30 to gain +117 for the day. The close at 17,890 is just under primary resistance at 17,925. Home Depot and Goldman were the primary Dow drivers with $2 gains but MCS, V, CVX, DIS and TRV all contributed with $1 gains.

Now we are faced with the question of "where do we go from here?" With all the indexes up including the Russell 2000, Dow Transports and the Biotech Index it would appear the afternoon rally was fairly broad based. However, all the indexes are facing critical resistance in a market with declining earnings.

The move looks a lot like a short squeeze and it may not have enough traction to push the indexes through resistance. Rebounds happen in down markets. The Nasdaq had been down for seven days and the Dow was only down two days but it was sharply lower. We had a rebound early last week after the fade from the prior Wednesday high. That rebound failed with a lower high and a lower low. That means the high from last Wednesday at 18,080 is not the critical level to watch. If we fail below that level and make another lower high then the start of a summer decline has been confirmed.

Current Portfolio

Current Position Changes

MLNX - Mellanox Tech

The long put position was entered at the open.

FL - Foot Locker

The long put position was closed at the open.

ACN - Accenture

The long call position was opened when ACN traded at $113.25.

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

ACN - Accenture PLC -
Company Description


No specific news. ACN rebounded strongly to trigger our entry into the position at $113.25.

Original Trade Description: April 20th.

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!

Position 5/2/16 with an ACN trade at $113.25

Long June $115 call @ $2.13, initial stop loss $111.45

PVH - PVH Corp - Company Description


No specific news. Nice rebound on no news.

Original Trade Description: April 21st.

PVH is an international apparel company. They operate in six segments including Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale and Heritage Brands Retail.

Some of the brands marketed by PVH in addition to those above include Van Heusen, iZod, Arrow, Warners, Olga, Eagle, Speedo, Geoffrey Beene, Kenneth Cole, Sean John, Michael Kors, Chaps, etc.

They sell through company operated stores, wholesale outlets, department stores, chain stoes, specialty stores, mass market stores, club stores, off-price and independent stores and distributors and through e-commerce. The company was founded in 1881.

Last week PVH announce it had closed on a deal to acquire the remaining 55% stake in TH Asia, the joint venture for Tommy Hilfiger in China. The deal will increase revenue by $100 million a year.

In February PVH inked a deal with G-III Apparel to allow G-III to design, manufacture and distribute Tommy Hilfiger women's wear in the U.S. and Canada. This not only includes PVH’s existing women's wear operations, but also new categories like suit separates, denim and performance. Long term I would not be surprised to see PVH buy G-III (GIII).

In January, PVH licensed MagnaReady, a shirt system without buttons, from MagnaReady Technology LLC. Men's sport and dress shirts with MagnaReady technology will be available in stores in 2016.

In their earnings reported in late March, they had earnings of $1.52 that beat estimates for $1.45 and exceeded PVH guidance for $1.37-$1.47. On a currency neutral basis earnings rose 7%. Revenue rose 2.1% to $2.112 billion also beating estimates.

Shares spiked on earnings in late March and then drifted lower as the gains were consolidated. They are starting to move higher again with resistance at $100. It may take a few days but I believe they will break that resistance, market permitting. Shares gained 78 cents today in a down market.

Earnings are late June.

Position 4/22/16

Long June $100 call @ $3.41, see portfolio graphic for stop loss.

V - Visa - Company Description


No specific news. Visa up with the Dow.

Original Trade Description: April 27th.

Visa bills itself as a "payments technology" company. They operate an open-loop payment network worldwide. The company facilitates commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities.

Everybody understands Visa. Unlike American Express, Visa does not have any credit risk. Visa licenses its cards and network to banks and financial companies and charges them a transaction fee for the service. Visa assumes no credit risk because it has no borrowers. The underlying banks assume the risk and the loans created by the customers.

This is about as close as you can get to the perfect business. It is a service everyone wants and you get paid every time one of your licensee's customers use their card.

Visa reported earnings on the 22nd and warned that earnings growth may be delayed because its purchase of Visa Europe Ltd for 21.2 billion euros would be delayed following feedback from the European Commission. Visa made changes to the deal to get EU approval. Visa and Visa Europe split in 2007 before Visa's IPO in the USA. The reacquisition of the European business will add significant earnings and growth to Visa. The modified acquisition may not be completed until after June 30th and therefore appear on the earnings for Q3 rather than Q2 as previously expected.

They also said timing issues surrounding the new partnership with Costco, and USAA would push some of the expected earnings into Q3.

They lowered top line growth estimates for fiscal 2016 to 7-8%, down from "high single digit to low double-digit" range they have previously specified. This is only due to the timing of the Europe acquisition and issues in the implementation of the Costco and USAA partnerships. Visa is fine and once they complete those items the growth will rise.

In the recent period earnings rose 10% to 68 cents and beat estimates by a penny. Revenue rose 6.4% to $3.63 billion. Payment volume rose 5.7% to $1.3 trillion.

Shares dipped $3 after the earnings report and have been moving up steadily the last four days. Visa is a Dow component and any Dow rally will lift Visa as well. Conversely, a Dow decline will weigh on Visa as well.

Position 4/28/16

Long June $80 call @ $1.58, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

FL - Foot Locker - Company Description


No specific news. FL looking more like a potential call play now after several days of rebounds. The position was closed at the open.

Original Trade Description: April 23rd.

Foot Locker is an athletic shoe and apparel retailer. They offer retail stores and online e-commerce. As of January 1st they operated 3,383 primarily mall-based stored in the U.S., Canada, Europe, Australia and New Zealand. There are 64 franchised stores in other countries. The company was founded in 1879.

Foot Locker is suffering from Nike fatigue. Nike whiffed on earnings last month and inventory was building. Cowen analyst John Kernan downgraded the stock from outperform to neutral. The analyst conducted multiple store checks. One included a high traffic location in NYC and several variations of the LeBron James shoes were discounted 50%, Kobe Bryant 40% and Kevin Durant 50%. On FL.com, 56 of the top 60 selling LBJ shoes, 50 of the top 58 KD shoes and 44 of the top 60 selling Kobe shoes are currently heavily discounted.

Cowen cited the popularity of the lower-priced Under Armour Steph Curry 2 and Nike Kyrie 2 was not enough to offset the declining growth/margins in the higher priced shoes. The analyst said the ability to constantly raise ticket prices was becoming more difficult. With Kobe now out of basketball they believe the sales of his shoes will decline. Same store sales (SSS) are likely to decline sharply because they are tied to the average selling prices. With so many shoes discounted it would be very hard to match prior SSS numbers. The increased promotional activity also reduces margins.

Another analyst said Foot Locker sales would be hurt by the current trend in declining mall traffic. It has been widely reported that mall traffic is in a secular decline and many malls are dying while others are spending millions to reinvent themselves. More and more people are shopping online and mobile rather than visit the malls.

Earnings May 20th.

Shares have been in decline since last September. The $59 level has been rough support but the decline is accelerating. I believe support will fail before earnings, which just happen to be on May expiration Friday.

Position 4/25/16:

Closed 5/2/16: Long May $60 put @ $1.94, exit $1.42, -.52 loss.

MLNX - Mellanox Technologies - Company Description


No specific news. Mellanox rebounded slightly after a week of significant declines. The rebound was lackluster.

Original Trade Description: April 30th.

Mellanox is a fabless semiconductor company that designs, manufactures and sells interconnect products and solutions. Their solutions are used in storage, datacenters and clouds. Their Internet communications products handle communications up to 100Gbps. They are also an Apple supplier.

The reported an 11% rise in revenue to $196.8 million and earnings of 81 cents. Both beat analyst estimates for $192.5 million and 75 cents. However, guidance was not so good. They expect Q2 revenue in the range of $210-$215 million and missing estimates for $216.8 million.

The company just acquired EZchip Semiconductor and the CEO believes the deal will translate into "compelling value to current and future customers." However, increasing expenses, expected to rise 8-10% could put a crimp into profits.

With Apple iPhone sales in a slump any supplier is guilty by association. Shares have declined -$10 since earnings and are falling fast. Support is in the $38 range. With tech stocks suddenly in the dog house there is no reason for shares to rebound.

Position 5/2/16

Long June $43 put @ $1.45, initial stop loss $46.35.

QQQ - Nasdaq 100 ETF Description


The Nasdaq closed positive after a string of 7 declined. Just a minor short squeeze. The impact on the QQQs was minimal.

Original Trade Description: April 28th.

The Powershares QQQ is an index tracking stock for the Nasdaq 100 Index ($NDX). The QQQ represents the 100 largest domestic and international nonfinancial companies listed on the Nasdaq Stock market based on market capitulation.

The Nasdaq 100 is expected to gap higher at the open on Friday. As with most opening gaps based on some post earnings activity there is a good chance the opening print is the high for the day. The shorts in those stocks that are gapping higher will cover and the buying interest will wane.

Amazon was up $75 in the afterhours session. Linkedin gained +8. Expedia gained +11 and Baidu +8. This should produce a decent opening bounce in the index.

However, the Nasdaq 100 close at 4,363 was the lowest close since March 11th. This is below support at 4,378 and suggests the index is breaking down.

I am recommending we buy puts on the QQQ at the open when the market gaps higher in anticipation of a drop in the $NDX back to 4,200.

Since I expect the index to gap higher I am recommending the at the money put. It should be a little cheaper at the open.

Position 4/19/16

Long June $106 put @ $2.63, see portfolio graphic for stop loss.

SPY - S&P 500 ETF - ETF Description


The S&P rebounded 16 points but it is still well below resistance at 2,100 and above.

Resistance has held and it may be a choppy week or two before a longer-term decline appears. Be patient.

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 declined in a positive market. Nearing the prior support at $14.

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, see portfolio graphic for stop loss.
Long June $16 put @ $1.45, see portfolio graphic for stop loss.
Net debit $3.52.

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