Option Investor

Daily Newsletter, Wednesday, 7/27/2016

Table of Contents

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

Market Wrap

Market On Hold for No Change

by Keene Little

Click here to email Keene Little
It seems like the market's been on hold for the past week until we got through today's FOMC announcement, which included no change to rates and no change to expectations. The market's muted response left indexes still chopping sideways waiting for something to kick it off dead center.

Today's Market Stats

AAPL started things off to the upside this morning, especially for the techs, after it received a positive response to its earnings report after yesterday's close. It gapped up nearly 8$ from about $98 to $104, settling near $104 at today's close. NDX futures (NQ) were up about 40 points before the open, pulled back in the morning and then rallied back up with the rest of the market this afternoon before giving back some into the close. The techs led the way higher today but the blue chips were not able to hold their gains and closed marginally in the red.

The blue chips have been weaker than the techs and small caps for the past week and that could be a bullish sign for the market as money leaves the relative safety of the big blue chips and heads over to the riskier higher-beta stocks. Either that or it's another sign of bullish complacency in the belief the market is heading higher. Usually tops in the market occur with higher highs for the riskier stocks while the blue chips hold back. Is that what we can expect here? It's anyone's guess but it's something to think about as we look for where this market might be heading and when it might be ready for at least a larger pullback.

This morning's economic reports included Durable Goods orders, which were disappointing (not that the market cared). Orders for June were down -4.0% vs. expectations for a drop of only -1.0% and worse than May's -2.8% (revised lower from the previously reported -2.2%). Taking out transportation orders, the number was -0.5% for June, down from -0.4% in May (revised lower from -0.3%) and worse than the +0.2% the market expected. Transportation goods made June's number worse and today the TRAN got smacked down much more than the broader market. I'll review its chart tonight.

This afternoon's FOMC announcement included, to no one's surprise, the Fed leaving the rate alone at 0.375%. In their statement they left few clues about when they're looking at another rate hike. They believe the economy is showing signs of improvement, which hints of another rate hike, but left no clues as to whether it could be in September or as the market believes is more likely, in December. They did say inflation is not showing any signs yet of heating up. The Fed's annual Jackson Hole, WY conference, scheduled for August 26th, could see a few more clues but for now there are just two words to describe today's announcement -- "No Change."

Odds for the next rate hike remained the same at about a 30% chance in September and 48% chance in December. My opinion is they won't be able to raise rates again and instead will be forced by the bond market in the other direction by next year, if not sooner.

Now the market waits for Japan's announcement on Friday about what kind of additional asset purchases they plan to make as they're expected to expand their QE efforts. There's also talk about a perpetual bond after Bernanke's meeting with Japanese leaders earlier in the month. A perpetual bond basically means the central bank will convert all existing government bonds to non-expiring bonds that pay no interest and the effect of that is basically to wipe out the government's debt, wipe their hands clean and start all over again. It would be a new and creative way of declaring bankruptcy without declaring bankruptcy.

The trouble with perpetual bonds is that the central bank will be the sole customer for the bonds. It would be the financial equivalent of the nuclear option since it would be a full admission by both the bank and government that they have debt that will never be repaid and instead will simply be pushed aside into perpetual bonds. Now you see it, now you don't. Genius really, except it would likely completely ruin the ability to sell additional bonds in the open market since future bond holders would be worried the same thing could happen to them again.

None of this had much of an effect on today's stock market but the bond market continued its rally following the decline in the July 21st low. The blue chips have either been chopping lower (the Dow) or sideways (SPX) or higher (techs and RUT). For two weeks we've had a choppy market and depending on the index you will see different possibilities for the next move. There are not many times I am neutral the market but this is one of them, which means trade setups are missing and it's a good time to stay patient and not force trades. I'll start tonight's chart review with the weekly chart of SPX.

S&P 500, SPX, Weekly chart

Last week SPX made a high at 2175.63 and so far this week's high is 2174.98 (this morning's opening spike up) so it's clear SPX is struggling with 2175. There's a price projection at 2177.67, shown on the chart that is within spitting distance and this is where the 2nd leg of a 3-wave move up from February is 62% of the 1st leg up (for a possible a-b-c bounce correction off the February low). Some shorter-term price projections and trend lines show reasons for a lot of resistance between 2175 and 2200 but if the bulls can power through that 25-point zone I see upside potential to 2223. This is level of the 127% extension of the previous decline (May 2015 - February 2016), which is often a target and reversal level. As I'll point out on the 60-min chart further below, this 2223 level shows up again on a smaller pattern. Above 2223, if this turns into a true melt-up and blowoff top, is a projection near 2293 where the rally from February would have two equal legs up.

S&P 500, SPX, Daily chart

A little closer view of the 2177.67 projection is shown on the daily chart and you can see how price has been consolidating just beneath that level. As mentioned above, there are a few price levels between 2175 and 2200 to watch, if reached, and one is a trend line across the highs since June 8th, currently near 2190. This is also a potentially important level that's shown on the 60-min chart below

Key Levels for SPX:
- bullish above 2178
- bearish below 2108

S&P 500, SPX, 60-min chart

SPX has been consolidating sideways since the July 20th high in a contracting triangle, which can be seen on the 60-min chart if you look closely. The post-FOMC spike down did a small throw-under below the bottom of the triangle, near 2161, and then rallied back up to the top of the triangle shortly before the close, near 2172. The pullback into the close kept SPX trapped inside, which keeps both sides guessing but the higher-odds play here is a breakout rather than a breakdown. The rally followed by a sideways consolidation is typically followed by a rally out of it. But, if it breaks down instead it could drop fast (failed patterns tend to fail hard).

Assuming it will rally out of this pattern, once above 2178 it could find resistance at its broken uptrend line from February-May, near 2181 (much higher if viewed with a log price scale), and then a trend line along the highs from July 14-20, near 2188. Above that is a projection at 2191, which is based on the EW pattern projection. It's also coincident with the trend line across the highs since June 8th, mentioned above with the daily chart.

Without trying to get all EW geeky on you, the sideways triangle fits as a 4th wave correction in the leg up from June 27th. That in turn points to the need for one more leg up to complete the 5th wave. Since the 3rd wave of this move is shorter than the 1st wave it's common for the 5th wave to be even shorter and a typical projection (with an extended 1st wave) is where the 3rd through 5th waves equals the 1st wave and that's the 2191 projection. Get it? Got it. Good. The other common projection is where the 5th wave achieves 62% of the 3rd wave, which points to 2221.82 and this matches up with the 2223 extension mentioned with the weekly chart above.

So to recap, I see upside targets/potential resistance levels at 2178, 2191, 2223 and then 2293. A drop below this afternoon's low at 2159 would be possible trouble but with all the choppy price action I'd be reluctant to chase it lower until I see more evidence of a turn down, such as a strong impulsive decline. Bears really need to see SPX below 2135 before they'll have a better shorting signal.

Dow Industrials, INDU, Daily chart

The Dow has been the weaker of the broader indexes I track but it still has left just a choppy pullback that looks more like a bull flag than something more bearish. As long as it holds above its May 2015 high at 18351 it remains bullish. Look for a possible test of that level this week and if it holds it could be a good opportunity to try a long position for another leg up. But I'd keep a short leash on the play and I'd be nervous about holding long positions overnight. The market is overbought and overloved and that's a dangerous combination. However, the flip side is that we have no signals to tell us to get short.

Key Levels for DOW:
- bullish above 18,350
- bearish below 17,900

Nasdaq Composite index, COMPQ, Daily chart

The first time the Nasdaq made it above its March 2000 high at 5132.52 was April-August 2015 which was followed by another test in December 2015. Today is the third time rallying above this key level and the bulls need to hope it holds above. The bears are salivating about the possibility for a triple top since it's very rare to see a quadruple top. In other words, if the current rally does not hold it's more likely to start a strong decline rather than just a pullback and then test it again. Today's little doji star has the potential to turn into a 3-candle reversal pattern if Thursday finishes with a red candle. But for the bulls, the break above 5132, and holding above, as well as getting back above its broken uptrend line from February-May is a bullish move. They just need to keep it from turning into a failed rally attempt right here. The next upside resistance level is the December 2015 high at 5176.77 (today's high was 5151). As I'll show on the 60-min chart further below, the bulls have a reason to be worried here.

Key Levels for COMPQ:
- bullish above 5177
- bearish below 5075

Nasdaq Composite index, COMPQ, 60-min chart

The Nasdaq's 60-min chart shows a trend line along the highs from June 23rd and that's where today's rally stopped. My best guess on the short-term pattern is that it needs a small pullback and then another push higher, possibly right to the 5176.77 December 2015 high, before it will complete its rally leg from June 27th. As can be seen on the oscillators, the new highs this month have been met with weaker and weaker momentum and this is bearish. The techs have been leading the charge to the upside this month but on weaker momentum and it's a setup for a collapse back down to at least 5000 where we'll have to evaluate it for possibly something more bearish or just a pullback correction.

Russell-2000, RUT, Daily chart

The RUT is another index that has been outperforming to the upside but the alternating up and down days (look at the alternating red and white candles for the past two weeks) as the index chops its way higher is typical of an ending pattern. I've had a 1205-1218 upside target/resistance zone and today it climbed marginally above this zone so that's bullish. But if it doesn't soon breakout into a sprint higher it will continue to look like an ending pattern and if it now drops below the July 20th low near 1198 it would be a good signal the top is in place. In the meantime I see upside potential to at least the trend line along the highs from April-June, currently near 1233.

Key Levels for RUT:
- bullish above 1233
- bearish below 1198

10-year Yield, TNX, Weekly chart

U.S. Treasury prices briefly spiked down on the FOMC announcement but then immediately bounced back up and continued the rally that started off the July 21st low. Yields of course did the opposite and we've seen a pullback in yields in the past week. So far TNX has only retraced 38% of its July 6-21 rally and could easily turn around and head higher in its current bounce off the July 6th low. A reversal of the pullback could see a rally (selling in bonds) to 1.80% for two equal legs up from July 6th. That's also where it would back-test its broken uptrend line from July 2012 - February 2015. Above that level would have me start thinking more bullishly about yields (bearish bond prices) but for now I'm looking at the bounce off the July 6th low as only a bounce correction in the longer-term decline (to at least 1% and maybe down to 0.5%).

KBW Bank index, BKX, Daily chart

Today's rally in the banks popped BKX above resistance at its 200-dma, which it had been consolidating underneath (and above its 50-dma) since July 14th. That has it looking bullish, as long as it holds above its 200-dma, currently at 67.89, for a possible run up to its downtrend line from July-December 2015, near 70 early next week. It takes a drop below price-level S/R near 66.50 to turn BKX bearish.

Transportation Index, TRAN, Weekly chart

The Transports sold off more strongly than other sectors today and TRAN finished down -1.5%, which reversed the bounce from the previous three days. This is happening following the test of downtrend lines from February 2015 - April 2016 and from August 2015 - April 2016, currently near 8000 and 7910, resp. The pullback from the July 14th high can be considered corrective, which points to another rally to follow but so far it remains bearish below 8000. Bulls would be in better shape above the April 20th high at 8149.

U.S. Dollar contract, DX, Weekly chart

The US$ has pulled back slightly from its downtrend line from December 2015, near 97.40, and the pullback is nearing the level (96.65) where it will achieve two equal legs down and so it could turn around and head higher from there. Additional support might be found at its crossing 20- and 200-dmas near 96.60. The dollar has been in a choppy consolidation since its March 2015 high and I suspect it will remain in its trading range the rest of this year.

Gold continuous contract, GC, Weekly chart

Gold has bounced a little this week after pulling back to support at its January 2015 high at 1308 and its 200-week MA, now at 1301.60 (last week's and this week's lows were near 1311. There is still the potential for another push higher to its downtrend line from September 2011 - October 2012, near 1410, and a price projection at 1417.50 for two equal legs up from December 2015. But a drop below 1285 would be a bearish heads up that we're looking for at least a larger pullback before heading higher, or a more bearish move back down to lower lows. Keep in mind that the bounce off the December 2015 low is so far just a 3-wave (a-b-c) bounce correction within a larger downtrend. We do not have any confirmation that a more significant low is in place no matter how much the gold bulls pound the table about why you should move your cash into gold (the usual reason is because the dollar is about to collapse, which I do not see happening until well after 2017).

Oil continuous contract, CL, Daily chart

Oil has continued its pullback from resistance near 51 and is now back-testing its 50-week MA at 41.46 (today's low was 41.68). This could lead to at least a bounce and obviously it would be more bullish above 51 but I think oil will continue lower.

Economic reports

Thursday will be a quiet day for economic reports and then Friday's will include an advance look at GDP, which is expected to improve to 2.6% for Q2 vs. the 1.1% we had for Q1. Also on Friday we'll get the Chicago PMI, which is expected to show a minor decline, and Michigan Sentiment, also expected to decline some.


Depending on which index I look at I could argue for another rally leg or I could argue the rally could top out at any time. The Dow has a choppy pullback, which has it looking like a bull flag and normally another rally leg would be expected. The RUT and tech indexes have been chopping higher, which has it looking like an ending pattern (such as a rising wedge). All have been in choppy patterns but they can't all be interpreted the same way. The techs and small caps have been leading the way higher for the past week but they remain below their all-time highs while the blue chips already achieved new all-time highs. Which index(es) do we believe?

Because of the mixed picture, including in the market internals (day to day they switch from bullish to bearish), one day I feel more bullish the next day I feel more bearish. I feel like my trading should be along the lines of "She loves me, she loves me not, she loves me, she..." Not seeing clear setups for either direction makes trading more like gambling and we're not gamblers (nod your head in agreement). There are good times to trade and there are bad times and this is one of the latter.

It's hard to do but sitting out the times without clear setups is what good traders do. Even if those setups turn out to be wrong there are clear stop levels with them but right now if you make an honest assessment of the charts it's hard to figure out where your stop should be (or it might be uncomfortably far away). Before making a trade the first thing you should be able to answer is where your stop belongs (and then decide if you want it to be on an intraday move or just the closing price).

My sense is that the rally is very close to finishing, within days if not hours. August might not be kind to bulls if this current rally has been primarily based on central bank money in response to the Brexit vote and fears about what's happening in Europe. The big question for us is whether or not we're going to see the usual summer swoon and if so there's a good chance it will start next month. In the meantime, wait for the pretty bus to come along to give you a ride; all ugly busses you can let pass.

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

Flying High

by Jim Brown

Click here to email Jim Brown

Editors Note:

While some companies are complaining about excess capacity in the market place this company is increasing profits. The excess capacity in the airline sector has caused a lot of earnings pain. Alaska Airlines is not one of them. They are growing and raising prices.


ALK - Alaskan Air - Company Description

Alaska Air Group, Inc. is the holding company of Alaska Airlines and Horizon Air. The Company operates through three segments: Alaska Mainline, Alaska Regional and Horizon. Its Alaska Mainline segment operates the Boeing 737 part of Alaska's business. It offers north/south service within the western United States, Canada, Mexico and Costa Rica, as well as passenger and dedicated cargo services to and within the state of Alaska. It also provides long-haul east/west service to Hawaii and cities in the mid-continental and eastern United States from Seattle. Its regional operations consist of flights operated by Horizon, SkyWest Airlines, Inc. and Peninsula Airways, Inc. Alaska is buying Virgin America and the acquisition is expected to be completed late this year.

In their recent Q2 earnings the company reported $2.12 compared to estimates for $2.08. Revenue of $1.5 billion rose 4% and was in line with estimates. Available seat miles increased 11.2% to 11,062 million. The load factor was 84.9% and flat year over year despite the sharp increase in miles. Passenger revenue per mile decreased 7.7% to 11.42 cents. Cost per available seat mile excluding fuel declined -3.7% to $7.78 cents. Earnings rose 12% to $418 million while expenses rose only 1%. The average fuel price was $1.53 per gallon, down from $2.12 in the year ago quarter. The company had $1.6 billion in cash at the end of the quarter with long-term debt of only $509 million.

Alaska expects capacity to rise by 8% in Q3 and by the same amount for the full year. They are adding 6 additional Boeing 737 planes to bring the fleet to 147 by the end of 2016. By the end of 2018 they expect to operate 156 planes. Despite the rising capacity the number of passengers is also rising to keep that load factor at a healthy 85%. With fuel prices falling their earnings are going to accelerate.

Earnings Oct 20th.

Shares rose on the earnings on the 21st and have continued to rise as other airlines whine about excess capacity cutting into earnings. Shares closed at a 3-month high on Wednesday and slightly over strong resistance at $67.50. If the breakout continues the next material resistance is $82.

With an ALK trade at $68.25

Buy Sept $70 call, currently $1.65, initial stop loss $62.50.


No New Bearish Plays

In Play Updates and Reviews

Nasdaq Surge

by Jim Brown

Click here to email Jim Brown

Editors Note:

Apple's $6 spike powered the Nasdaq well over the 5,100 resistance level and Thursday could be a repeat. With Facebook posting blowout earnings after the close and spiking $10 in late trading we could see another big jump in the Nasdaq on Thursday. It is the earnings after Thursday's close that could be a problem with Amazon, Google and Baidu reporting. There is no reason to expect them to disappoint but it is always possible. If they were to surprise to the upside like Apple and Facebook, the Nasdaq could punch through the 5100-5160 resistance band and threaten a new high. That would energize the markets.

The Dow and S&P closed negative after the Fed statement seemed to suggest the September meeting was back on the table for a potential rate hike. The statement contained the phrase "near term risks have diminished" and that was the key to increasing rate hike expectations.

Current Portfolio

Current Position Changes

RH - Restoration Hardware

Cancel the long call recommendation.

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

AKRX - Akorn Inc -
Company Description


No specific news. New 7-month high on a 4% gain.

Original Trade Description: July 20th.

Akorn, Inc. is a specialty generic pharmaceutical company that develops, manufactures, and markets generic and branded prescription pharmaceuticals, as well as private-label over-the-counter (OTC) consumer health products and animal health pharmaceuticals in the United States and internationally. It operates in two segments, Prescription Pharmaceuticals and Consumer Health. The Prescription Pharmaceuticals segment markets generic and branded ophthalmics, injectables, oral liquids, otics, topicals, inhalants, and nasal sprays. This segment's generic products include Atropine Sulfate Ophthalmic Solution; Clobetasol Propionate Ointment; Dehydrated Alcohol Injection; Ephedrine Sulfate Injection; Hydralazine Hydrochloride Injection; Lidocaine Ointment; Methylene Blue Injection; Myorisan Soft Gelatin Capsules; Nembutal Sodium Solution; and Progesterone Capsules. The Consumer Health segment markets branded and private label animal health products, as well as OTC products for the treatment of dry eye under the TheraTears brand name. This segment also markets other OTC consumer health products, including Mag-Ox, a magnesium supplement, as well as the Diabetic Tussin line of cough and cold products.

Akorn has hundreds of existing products and 86 drugs with applications pending with the FDA. Those applications include 27 ophthalmic drugs, 12 topical drugs and 34 injectable drugs with a target market of $9.2 billion. Six of the applications have already been tentatively approved and 50 are currently being approved. At least 25 will be approved by 2017 and they expect to file an additional 20 applications this year. Akorn is targeting generic applications on the highest volume branded prescription drugs. They exclusively file Para IV applications. The first generic company to submit a substantially completed ANDA (Abbreviated New Drug Application) is given marketing exclusivity for the first 180 days on the market. There is no competition in that period and they can get a head start on prescriptions in that period. Most patients never change from the original generic they are assigned.

Revenue rose from $318 million in 2013 to $985 million in 2015. In 2016, the company expects to earn $1.08 billion. The company's guidance is for 80% earnings growth in 2016.

Earnings August 4th.

Shares of Akorn closed at a 7 month high on Wednesday at $31.80. The current uptrend began with the post Brexit low at $26. Resistance is $38.50.

Position 7/22/16:

Long Sept $35 call @ $1.30, see portfolio graphic for stop loss.

LL - Lumber Liquidators - Company Description


LL reported Q2 adjusted earnings of 25 cents that matched estimates. Revenue of $238.1 million just barely missed estimates for $238.4 million. In June the company resolved the majority of legal issues surrounding the Chinese flooring and it will take some time for the resolution to translate into a return of customers. Same store sales declined -7.2% and slightly more than the 5.4% analysts expected. This is still better than the big declines in the prior 4 quarter while the Chinese flooring scandal was in the press.

We entered this as a long-term position with the November call. I wish the Q2 earnings were better but that is behind us now. We are going to hold the position and hope the pre earnings rally continues.

Original Trade Description: July 7th.

Lumber Liquidators operates as a multi-channel specialty retailer of hardwood flooring, and hardwood flooring enhancements and accessories. It primarily offers hardwood species, engineered hardwood, laminates, and resilient vinyl flooring; renewable flooring, and bamboo and cork products; and a selection of flooring enhancements and accessories, including moldings, noise-reducing underlay, adhesives, and flooring tools. The company also provides in-home delivery and installation services. The company offers its products primarily under the Bellawood brand and Lumber Liquidators name. It primarily serves homeowners, or to contractors on behalf of homeowners. As of December 31, 2015, it operated 366 stores in the United States and 8 stores in Canada.

LL was trashed in March 2015 after a 60 Minutes report that the laminate flooring sourced from China had excessive levels of formaldehyde. Shares dropped from the prior close just under $70 to $10 earlier this year. Sales plummeted and earnings took a dive.

On Friday the company announced that the Consumer Products Safety Committee (CPSC) had closed their investigation and the only concession LL had to make was to not sell laminate flooring made in China. Since they already stopped that practice 13 months ago, it was basically a get out of jail free card. Shares spiked 19% on Friday to $15.78.

The company also reported that they had tested 15,000 homes with that flooring installed and NONE of those homes had chemical levels over the recommended norms. Of those 70,000 homes some 1,300 underwent special testing by a certified laboratory and NONE of those homes tested above safe levels either.

The CPSC also warned about ripping out the existing flooring and replacing it. They said the process of ripping it out would expose homeowners to excess levels of the chemical so that removes the possibility of a massive recall problem by LL.

LL has a class action suit brought by homeowners but with the CPCS saying there is no problem with the installed floor the suit just lost its main reason for existing. I am sure it will continue and they will try to get some damages but proving you have been damaged when there is no problem is going to be a challenge.

LL escaped a massive recall. They will probably settle for peanuts on the class action suit and there were no fines or penalties. They are probably celebrating all weekend at the corporate headquarters.

Now all they have to do is win back the customers. Same store sales have been down 10-13% because of the looming problems. Now that they can claim there never was any problem they can launch a massive advertising campaign and sales should recover. It may be slow at first but they still have a good selection of products at the right prices.

While their troubles may not be completely over they are light years closer to business as usual than they were a week ago. Funds and investors have ignored their stock but with the all clear from the CPSC they should come flooding back in hopes of getting a bargain entry.

Earnings July 27th.

LL shares spiked to $16 on the news back in mid June. They moved sideways until the Brexit crash and lost altitude back to $14. Today's close was a six-month high over that headline spike in June. I believe the stock is poised to go higher now that it is trying to pull out of its yearlong consolidation.

I am going to recommend a longer-term option and suggest we hold over the July 27th earnings. They would be hard pressed to say anything more negative than what the market already expects. The potential for good news and positive guidance is very good.

Position 7/8/16:

Long Nov $18 call @ $2.15. No stop loss because of the cheap option and the longer term.

NVDA - Nvidia - Company Description


No specific news and minor profit taking after Tuesday's historic high.

Original Trade Description: July 19th.

NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company’s products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors.

Q1 earnings rose 46% to 33 cents and beat earnings by a penny. They hiked full year revenue guidance as well as the current quarter. Tor Q2 they raised the forecast to $1.35 billion that was above analyst estimates at $1.28 billion. Gaming revenue was up 17% to $687 million but all areas of effort saw significant gains. They recently released a new graphics card that is twice as fast and 40% cheaper than the card it is replacing.

Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.

The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.

The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.

The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.

More than 50 automakers are testing the new Drive PX chip for self-driving cars. The chip combines inputs from cameras, lasers, maps and sensors to allow cars to drive themselves and learn from each experience.

Update 7/25/16: Nvidia announced two more high-end graphics cards on July 25th for the professional workplace. These are for professionals that need extremely high graphics rendering like video editors, photographers, CAD software users, etc. The P5000 handles up to 4 monitors with 16gb of embedded GDDR5X memory. The P6000 also handles up to 4 monitors with 24gb of GDDR5X memory. Earnings August 11th.

We were stopped out of the August position last week and I said we would be entering a new position on this stock. I am recommending we enter an October position and hold over earnings on August 11th. Nvidia has everything working for it including a string of recent product announcements and earnings should be good and guidance even better.

This is a risk. We all know what can happen if they disappoint. I believe Nvidia will make new highs, market permitting, and we can go along for the ride.

I am recommending the Oct $60 strike at $1.42 because I believe it will be over $60 by then and $1.42 is not too much to risk to hold over an earnings report.

Position 7/20/16 with a NVDA trade at $54

Long Oct $60 call @ $1.55, no initial stop loss.

PVH - PVH Corp - Company Description


No specific news. Minor decline in a mixed market.

Original Trade Description: June 27th.

PVH Corp. operates as an apparel company in the United States and internationally. The company operates through six segments: Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale, and Heritage Brands Retail. It designs, markets, and retails mens and womens apparel and accessories, branded dress shirts, neckwear, sportswear, jeans wear, intimate apparel, swim products, handbags, footwear, golf apparel, fragrances, cosmetics, eyewear, hosiery, socks, jewelry, watches, outerwear, small leather goods, and home furnishings, as well as other related products. The company offers its products under its own brands, such as Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW, Warners, Olga, and Eagle; and licensed brands comprising Speedo, Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, Sean John, MICHAEL Michael Kors, Michael Kors Collection, and Chaps, as well as various other licensed and private label brands.

PVH has been absolutely crushed in the sell off because they were thought to have as large presence in the UK. Shares closed at a new 9-month high of $102.70 on Thursday. Today they touched $84 intraday for a whopping $18 or roughly 18% decline in two days from a new high.

PVH thought it was important enough that they filed a disclosure with the SEC saying they only derived 3% of their revenues from the UK. Even with the massive drop in the pound the company did not think any UK weakness would be material to their results.

The company has been on a growth spurt by acquiring brands and doing license deals with other brands to improve the variety of its offerings. On June 15th the CEO spoke at a Piper Jaffray Consumer Conference and said business was improving in Q2. He said the problems with other retailers represented an opportunity for the Calvin Klein and Tommy Hilfiger brands. He said the Tommy Hilfiger women's business generates 30% of their revenue and was a growth opportunity since they recently added it to the line. They teamed up with super model Gigi Hadid to make the brand more relative to younger, fashion oriented women.

With their Q1 earnings they raised guidance from $6.30-$6.50 to $6.45-$6.55 a share for the full year. The CEO said the guidance was conservative because this "does not seem like the environment ro tray and be a hero."

Earnings August 24th.

Position 6/28/16:

Long August $90 call @ $4.23, see portfolio graphic for stop loss.

RH - Restoration Hardware - Company Profile


No specific news. After two days of declines I am cancelling the recommendation until we actually see a breakout.

Original Trade Description: July 23rd.

Restoration Hardware Holdings, Inc., together with its subsidiaries, engages in the retail of home furnishings. It offers products in various categories, such as furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. The company sells products through its stores and catalogs, as well as through its Websites, such as restorationhardware.com, rh.com, rhbabyandchild.com, rhteen.com, and rhmodern.com. As of January 30, 2016, it operated 69 retail galleries that include 53 legacy galleries, 6 larger format design galleries, 4 next generation design galleries, 1 RH modern gallery, and 5 RH baby & child galleries, as well as 17 outlet stores throughout the United States and Canada.

RH surprised investors in early June when they reported an unexpected loss. Shares fell from $36 to $25 as investors panicked. The luxury retailer reported a loss of 5 cents compared to estimates for a 5-cent profit. The CEO said the company "was being pressured by the continued retail headwinds in a market impacted by energy, currencies and a general slowdown in the luxury consumer market." In addition, "the costs associated with RH Modern production delays and investments to elevate the customer experience, the timing of recognizing membership revenues related to the transition from a promotional to a membership model, and more aggressive approach to rationalizing our SKU count to optimize inventory, are expected to impact fiscal 2016 earnings by $.90 to $1.00." However, he said all these factors are short term and performance will improve in Q4 and accelerate into 2017.

Earnings September 8th.

On June 22nd, shares rallied 10% after a BB&T analyst said the company should sell itself or merge with Williams Sonoma (WSM). Several other analysts picked up the thread and agreed it would be a good move. While CEO Gary Friedman may not be ready to join forces, the weak luxury retail market may force him to consider the option. The constant talk could also provide an incentive to other potential acquirers to come knocking on his door. The RH business is a good business. They are evolving and they will be stronger in 2017.

On July 18th Friedman bought 32,918 shares of the stock at an average price of $27.75 or roughly $915,000. He did not need to make this buy since he already owns 2,207,451 shares. A CEO would only buy another million dollars of the stock if he really believed it was going higher. Director Keith Belling bought 4,000 shares on June 28th for $101,000 to bring his holdings up to 18,608 shares.

If the market continues higher I would expect RH to break through resistance at $31.25. Because of the potential for a market decline I am putting an entry trigger on the position. The option is cheap so we will not have much risk.

Recommendation cancelled

TASR - Taser Intl - Company Description


No specific news. Another new closing high.

Original Trade Description: July 14th.

TASER International, Inc. develops, manufactures, and sells conducted electrical weapons (CEWs) worldwide. The company operates through two segments, TASER Weapons and Axon. Its CEWs transmit electrical pulses along the wires and into the body affecting the sensory and motor functions of the peripheral nervous system. The company offers TASER X26P and TASER X2 smart weapons for law enforcement; TASER C2 and TASER Pulse CEWs for the consumer market; and replacement cartridges. It also provides Axon Body, a body-worn camera for law enforcement; Axon Body 2 camera system; Axon Flex camera system that records video and audio of critical incidents; TASER Cam HD, a recording device; Axon Fleet, an in-car video system; Axon Interview, a video and audio recording system; Axon Signal, a body-worn camera; and Axon Dock, a camera charging station. In addition, the company offers Evidence.com, a cloud-based digital evidence management system that allows agencies to store data and enables new workflows for managing and sharing that data; Evidence.com for Prosecutors to manage evidence; and Evidence Sync, a desktop-based application that enables evidence to be uploaded to Evidence.com. Further, it provides Axon Capture a mobile application to allow officers to capture digital evidence from the field; Axon View, a mobile application to provide instant playback of unfolding events; Axon Five, a software application to enhance and analyze images and videos; Axon Convert, a software solution to convert unplayable file formats; and Axon Detect, a photo analysis program for tamper detection.

With all the shootings both by police and at police the need to be able to accurately document the events is becoming even more important. The multiple shootings by police and captures on cell phone video only shows one side of the event. If those cops had body cameras to document what they were seeing, hearing and saying, it would go a long way towards making those events less of a flash point if they can present their side of the event.

Since the Dallas shootings, Taser has won orders for more than 1,591 body cameras from the San Jose Police Dept and the Minneapolis Police Dept along with a 5-year subscription to Evidence.com, Taser's cloud based digital evidence management platform. Taser said demand was growing rapidly and they were in discussions with many more departments about their full range of evidence technology.

According to Taser more than 3,500 agencies and departments from 33 major cities now use their cameras.

The Axon body cameras only cost $399 each but the subscription to Evidence.com is $79 for each camera. The city of Chicago bought 2,031 cameras for $810,369. However, the 5-year subscription to Evidence.com was worth $9.63 million in recurring revenue. Earnings August 4th.

Shares spiked to $28.50 after the Dallas shootings and then pulled back to $26.50 after the headlines cooled. The news of the big orders lifted shares back to $27.50 and rising. Taser was already in a strong uptrend and the temporary spike has now been digested and the trend is returning.

I am recommending we buy the Sept $29 call, currently $1.60. If the market rolls over as I expect on Friday we could get a better entry on Monday. I am recommending an entry trigger at $27.80, which is above today's high. If the market opens lower, we will not be triggered and we can reevaluate the entry point for Monday.

Position 7/15/16 with a TASR trade at $27.80

Long Sept $29 call @ $1.49, no initial stop loss.

WDC - Western Digital - Company Description


No specific news. WDC will announce earnings on Thursday. They already preannounced an earnings beat so there is not likely to be any negative news. I am recommending we hold over the report but cautious investors may want to exit before the close. We are up $1.50 in the position so there are gains at risk.

Original Trade Description: July 9th.

Western Digital Corporation, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. It provides HDDs and solid-state drives for performance enterprise and capacity enterprise markets desktop, and notebook personal computers (PCs). The company also offers HDDs embedded into WD, HGST, and G-Technology branded external storage appliances with capacities ranging from 500 GB to 24 TB, as well as using various interfaces, such as USB 2.0, USB 3.0, FireWire, Thunderbolt, and Ethernet network connections.

WDC just completed the acquisition of flash memory maker SanDisk on May 12th and the combination will put it significantly ahead of Storage Technology (STX). WDC can include flash memory into its disk drive products to make them significantly faster as well as expand its offerings in the SSD market. By acquiring the SanDisk product line it provides a large amount of marketing breadth and created the premium data storage company.

Last Wednesday WDC raised adjusted earnings guidance to 72 cents, up from 65-70 cents. Analysts were expecting 68 cents. They raised revenue guidance from $3.35-$3.45 billion to $3.46 billion. Analysts were expecting $3.41 billion. This is the second guidance raise for this quarter. Back on May 26th they raised revenue guidance from $2.6-$2.7 billion to $3.35-$3.45 billion.

Update 7/26/16: WDC announced it had developed the next generation 3D NAND technology with 64 layers of vertical storage capability. Initial production is expected later this year and commercial volumes of BiCS3 in the first half of 2017. Initial production will be in 256 Gigabit modules with a range up to 1 Terabit on a single chip. Susquehanna Financial said the new chip could allow WDC to topple the current leader, Samsung, in 3D NAND. Earnings July 28th.

WDC has solid resistance at $51 but a breakout over that resistance could quickly sprint to $60. I am using the October options to avoid the rapid decline in August premium after July expiration next Friday. We will exit before earnings on the 28th. This is a short-term play to capture any continued market breakout.

Position 7/11/16:

Long Oct $52.50 call @ $3.23, see portfolio graphic for stop loss.

XBI - Biotech ETF - ETF Profile


Strong breakout over $60 as expected with a 3% gain.

Original Trade Description: July 25th.

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index. The fund is equally weighted unlike the IBB which is market cap weighted.

The biotech sector was crushed back in January when Clinton locked on to high priced drugs as un American and pledged to force companies to sell drugs at reasonable prices. Several other candidates picked up the topic and the sector was trashed. The two remaining candidates have moved on to other issues and Clinton is looking less likely to win. Trump is a businessman and understands companies have to make a profit in order to fund future research. He has made comments about drug prices but he is not expected to actually change anything in that area if elected.

After several false starts the ETF is about to break out to a 6-month high over $60. If the XBI does breakout the next material resistance is $70 and it traded as high as $90 last year before the Valeant disaster.

Fortunately, the XBI is not a stock and does not report earnings so we can hold it through the earnings cycle. Any biotech stocks reporting decent earnings will lift the ETF. I am using the September strike because the next series is December and the options are grossly expensive.

Position 7/26/16: Long Sept $60 call @ $2.41. See portfolio graphic for stop loss.

Z - Zillow Group - Company Description


No specific news. Another new high on stronger than expected pending home sales.

Original Trade Description: June 29th.

Zillow Group, Inc. operates real estate and home-related information marketplaces on mobile and the Web in the United States. It offers a portfolio of brands and products to help people find vital information about homes, and connect with local professionals. The company's brands focus on various stages of the home lifecycle, such as renting, buying, selling, financing, and home improvement. Its portfolio of consumer brands includes real estate and rental marketplaces comprising Zillow, Trulia, StreetEasy, and HotPads. The company also provides advertising services to real estate agents and rental and mortgage professionals; and owns and operates various brands that offer technology solutions to real estate, rental and mortgage professionals, including DotLoop, Mortech, Diverse Solutions, and Retsly.

Back in August 2015 Zillow Group split its stock 2:1 but the new stock had no voting rights. The Class C stock trades under the symbol Z while the Class A stock with rights traded under the symbol ZG. The company did this so the voting rights would not be diluted. Multiple companies have done this including the biggest to date with Google and Facebook. The split has no impact on the company operation except that employees now receive Z shares and any acquisitions will be made with Z shares.

The company acquired Trulia.com for $2.6 billion in 2015 and contrary to analyst concerns the integration has been relatively smooth. There were some hiccups but everything is functioning normally today.

They reported Q1 earnings of 13 cents that beat estimates for a loss of 9 cents. Revenue rose from $127.3 million to $186 million and beat estimates for $177 million. They also raised full year guidance from $805-$815 million to $825-$835 million. Analysts were expecting $794 million. They ended the quarter with $514 million in cash. Marketplace revenue rose 23%, real estate revenue rose 34% and mortgage revenue rose 65%.

Earnings August 4th.

In early June, the company made a windfall settlement with Move.com for $130 million after two years of litigation. Analysts were expecting $1.8-$2.0 billion. This pending litigation had been a cloud over the stock for the last 8 months. After the settlement shares spiked to $32 and traded sideways for two weeks before moving up to new highs at $35.50. The Brexit crash knocked the shares back to $32.75 but after the last two days of gains it is threatening to breakout once again.

Shares closed at $35 so the August $40 strike is a little far out for a short period of time. I am going to stretch to the November $40 strike, which will have significant expectation premium when we exit before earnings.

Position 6/30/16:

Long Nov $40 call @ $2.30, initial stop loss $32.50.

BEARISH Play Updates (Alpha by Symbol)

AMCX - AMC Networks - Company Description


No specific news. Closed at a 5-week low.

Original Trade Description: July 16th.

AMC Networks Inc. engages in the ownership and operation of various cable television's brands delivering content to audiences, and a platform to distributors and advertisers in the United States and internationally. The National Networks segment operates five distributed entertainment programming networks under the AMC, WE tv, BBC AMERICA, IFC, and SundanceTV names in high definition and standard definition formats. This segment distributes its networks in the United States through cable and other multichannel video programming distribution platforms, including direct broadcast satellite and platforms operated by telecommunications providers.

RBS says AMCX is a dead man walking. They downgraded the network to "sell" because some of its most popular shows are seeing their ratings walk off a cliff. The previously popular series "The Walking Dead" (TWD) has declined significantly in the ratings with a 40% drop in the 2016 season. The show routinely kills off cast members that have been with the program for years. The finale for the sixth season saw viewership significantly lower than the prior season finale. Spoiler alert, another prominent cast member is not going to make it through the next season opener. The cliff hanger left viewers unsure which one it will be but all the major players are at risk.

The new show that was spun off from TWD was "Fear the Walking Dead" and it barely made it out of the first half of the second season season alive. AMC has said it will air the second half of season 2 starting on August 21st. if viewership does not pick up fast there may not be a season 3.

Another previously popular show "Better Call Saul" saw "strong double digit ratings declines" while viewership on the new shows "Preacher," "Night Manager" and "Feed the Beast" has been lackluster at 50% less than analysts expected.

UBS is also worried that AMC will be shutout of the skinny bundles that will be offered by Hulu in 2017. That would be a further cash drain on AMC.

Earnings August 4th.

Shares dropped -4% to $56.59 on the RBS downgrade on Friday but that could be the start of a larger decline. The 52-week low was $55 in late June. Morgan Stanley cut AMC from buy to neutral in late June. Shares spiked on the 30th after Lions Gate bid for Stars. AMC was thought to be up for grabs if there was further media consolidation. Since that spike shares have traded sideways despite the strongly bullish market. The drop on Friday killed that sideways trend.

Position 7/18/16:

Long Sept $55 put @ $2.30, see portfolio graphic for stop loss.

HSY - Hershey Company - Company Description


When Mondelez bid for Hershey it was $107 in a combination of cash and stock. Mondelez shares fell -3% today making the bid worth less. Shares of Hershey closed at a post bid low at $108. Hershey reports earnings on Thursday. I am recommending we hold over. Several analysts have downgraded Hershey's earnings estimates and there is a good chance they will say something that sends the stock lower. In April Hershey beat on earnings, missed on revenue and guided lower for the full year. The guided for earnings of $4.24-$4.28 and analysts were expecting $4.34. In 2015 they cut revenue guidance 4 times. No specific news today.

Original Trade Description: July 2nd.

The Hershey Company manufactures, imports, markets, distributes, and sells confectionery products. It offers chocolate and non-chocolate confectionery products; gum and mint refreshment products comprising chewing gums and bubble gums; pantry items, such as baking ingredients, toppings, beverages, and sundae syrups; and snack items, including spreads, meat snacks, bars and snack bites, and mixes. The company provides its products primarily under the Hersheys, Reeses, Kisses, Jolly Rancher, Almond Joy, Brookside, Cadbury, Good & Plenty, Heath, Kit Kat, Lancaster, Payday, Rolo, Twizzlers, Whoppers, York, Scharffen Berger, Dagoba, Ice Breakers, Breathsavers, and Bubble Yum brands, as well as under the Golden Monkey, Pelon Pelo Rico, IO-IO, Nutrine, Maha Lacto, Jumpin, and Sofit brands.

Snack maker Mondelez bid roughly $23 billion for Hershey last week and the offer was quickly refused. Hershey has turned down several acquisition offers since 2002. In 2002 the Wrigley company tried to buy it and failed. In 2007 Cadbury also failed. In 2010 the trust prevented Hershey from bidding to buy Cadbury. The problem with acquiring Hershey is that the Hershey Trust Co. owns 81% of the voting stock and 8.4% of the common stock. Nothing will happen unless the trust approves.

The trust was setup in 1909 to benefit the Milton Hershey School for underprivileged children and the community of Hershey Pennsylvania. The trust has built up a $12 billion endowment for the school and is well liked for the good works done around the community.

The board has also said multiple times they do not want to sell the company.

Another factor is the Pennsylvania Attorney General. Any sale would require the approval of the AG under a 2002 state law. He has the power to overrule the trust if he feels any sale would not benefit the citizens of Pennsylvania.

Here is where the challenge comes in. If Mondelez buys the Hershey Company then the trust gets a lump sum of money but that is all they will ever get. Once they spend it the benefit is over. If Hershey stays independent the trust will remain the benefactor of Hershey PA for another century. The profits from Hershey will continue to flow through the trust to the school and other entities to support the community. Hershey pays out about $500 million a year in dividends. The AG is not likely to allow the golden goose to be sold.

I believe this acquisition bid will fail. Mondelez may raise the offer but I doubt the board, trust or AG will accept it. The spike in the stock to $115 will fail and shares will return to the $95-$100 level where they were trading lat week.

This is a speculative position so do not play with money you cannot afford to lose. I am making this a spread because the put options are expensive for obvious reasons.

Earnings July 28th.

Position 7/5/16:

Long August $110 put @ $5.15, no initial stop loss.
Short August $100 put @ $1.52, no initial stop loss.
Net debit $3.63

IWM - Russell 2000 ETF - ETF Description


Resistance at $120 has failed and the Russell 2000 has broken out to a new 52-week high. Thursday is the peak in the Q2 earnings cycle and we could see the market decline the following week. If not, this position will expire worthless.

Original Trade Description: July 2nd.

The Russell 2000 ETF attempts to track the investment results of the Russell 2000 Index composed of small-capitalization U.S. equities.

The Russell 2000 is facing strong resistance from 1150-1165. The index actually touched 1,190 in early June but I seriously doubt we will see that level again. The S&P closed right at 2,100 and has strong resistance from 2100-2115. The Dow closed only 72 points under the post Brexit close at 18,011.

We recovered from the post Brexit crash on a combination of equity fund window dressing for the end of the quarter and pension funds rebalancing the ratio of bond to equities. Reportedly they had to buy up to $18 billion in equities.

Now we are at resistance and all those uplifting events are over. The uncertainty over the UK exit still exists and the dollar/pound imbalance will cause a significant number of earnings warnings for Q3.

All the fundamentals point to a weak July and the artificial lift from the end of the quarter buying is over.

Note the volume in SPY and IWM puts for August on Thursday. The far right column is the open interest and the second from the right is the volume traded on Thursday. This is about 3 times the number of calls for the same period. The vast majority of traders are expecting a market decline.

I am recommending we buy puts on the IWM because the premiums are cheaper. I am recommending an entry trigger because we could still move higher ahead of the long weekend. S&P future are down -4 but that could be temporary.

Position 7/5/16 with an IWM trade at $113.95

Long August $112 puts @ $2.62. No initial stop loss.

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