Option Investor

Daily Newsletter, Monday, 8/8/2016

Table of Contents

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

Market Wrap

Bulls Remain in Charge

by Keene Little

Click here to email Keene Little
Despite all the "right" reasons why the stock market should be declining it continues to rally instead. We all know a logical stock market is an oxymoron and I'm betting there are more than a few bears who are feeling moronic for fighting this market. Many are throwing in the towel.

Today's Market Stats

Whether the market is rallying more from short covering (by bears who can't believe their eyes but covering nevertheless) or because there are many who believe the market really does have much higher potential, the fact remains that the market is rallying in the face of a deteriorating economy and corporate earnings. It's literally climbing the wall of worry while the bear are simply climbing the walls. How long this will continue is anyone's guess but at least we have some charts to show potentially important levels to watch.

I'm filling in for Tom today since he and his wife have been blessed with the birth of their baby. Send him good wishes (for some sleep as well, wink).

There was very little news today and no major economic reports and basically the stock market gapped up following an overnight rally in the futures (they rallied with the European markets, pulled back a little and then bounced a little into the open. But there was no follow through to the gap open and the market immediately pulled back into the red, which was then followed by a sideways consolidation for most of the day. Trading volume was low and even though the major indexes closed marginally in the red the internals were actually slightly positive.

All in all I'd give today a more positive than negative grade, especially since a consolidation keeps the pattern bullish, but maybe not for long. I'll start tonight's review with a top-down look at NDX

Nasdaq-100, NDX, Weekly chart

There are a couple of different ways I can look at the weekly pattern of NDX from an EW perspective but regardless, there is the potential for bulls to run into trouble as it approaches the 4800-4865 area. There is the March 2000 high at 4816.35 that is clearly in the bull's sights and only about 16 points above last Friday's high at 4799.86. Just below the March 2000 high is a projection at 4799.20 (achieved on Friday) where a large 3-wave move up from 2009 has two equal legs up for a big A-B-C bounce within the secular bear market. The higher projection at 4865 is where the move up from February would achieve two equal legs up. Based on these projections a rally above 4865 would be much more bullish. But bulls should be careful in the 4800-4865 area since there's a good possibility we'll see a high in this zone.

Nasdaq-100, NDX, Daily chart

There's one other projection for NDX at 4818 -- the 162% extension of the previous decline (April-June) is at that level and the correlation with the other projections, and March 2000 high, make this a potentially very important level. The bulls are fine until NDX drops below the August 2nd low near 4689 since that would be a good indication the top is in place.

Key Levels for NDX:
- bullish above 4820
- bearish below 4689

Nasdaq-100, NDX, 30-min chart

A close-up view of NDX is shown on the 30-min chart below. It shows NDX has remained inside an up-channel since rallying up into on July 8th. Since then, other than the brief throw-over on August 1st and the brief throw-under on August 2nd (two head-fake moves), price has remained inside the channel. Last Friday's high stopped at the top of the channel and the bottom is currently near 4764 so it can be used as a short-term guide to see how well each side is doing.

S&P 500, SPX, Daily chart

SPX had been stalled since July 20th beneath a price projection near 2178, which is where the 2nd leg of a 3-wave move up from February is 62% of the 1st leg. Equality is up near 2293 so that's the upside potential that bears need to keep in mind. Friday's rally popped SPX above 2178 and today it held that level, keeping the pattern bullish. But there's another price projection not far above, near 2191, that's based on the pattern for the leg up from June 27th. That coincides with a trend line across the highs from April-July so watch that level carefully for the possibility of a top. A rally above 2192 would open the door to 2220, which is where the 5th wave of the rally from June 27th would be 62% of the 1st wave (a common projection when the 1st wave extends, as in this case). And then if the bulls are really feeling feisty, there's the 2293 projection. The first sign of trouble for the bulls would be a drop below the August 2nd low near 2147 since that should then lead to at least a large pullback and potentially something much more bearish.

Key Levels for SPX:
- bullish above 2192
- bearish below 2147

S&P 500, SPX, 30-min chart

The SPX 30-min chart shows the pattern for the rally from August 2nd and a 5-wave count that I'm watching. The pattern ideally only needs one more new high to complete the count and the 5th wave would equal the 1st wave near 2192, which "coincidentally" matches the other projection and trend line near 2191. That makes it an important level to watch if reached. Below that is a projection at 2186.55, which is where the 5th wave of the move up from August 2nd would be 62% of the 1st wave and that matches the 127% extension of the previous decline (August 1-2), which is a common reversal Fib to watch. Assuming we'll get another, and final, leg up from here, watch 2186-2187 and then 2191-2192 for the completion of this rally. Depending on the form of the pullback/decline (assuming that's still allowed) we'll then get an idea about whether to look at it as a buying opportunity or instead something to short.

Dow Industrials, INDU, Daily chart

Similar to SPX, the Dow has a trend line running along the highs from April-July that's currently near 18730 and that makes for a good upside target for now. A short-term price pattern suggests an upside target near 18653, which gives us a relatively wide zone to watch for a completion to the rally.

Key Levels for DOW:
- bullish above 18,800
- bearish below 18,247

Russell-2000, RUT, Daily chart

The RUT is slightly different from the Dow and SPX in that it has two trend lines along the highs since April to watch (April-June and June-July). The June-July trend line stopped the rally a few times at the end of July and August 1st but last Friday's rally popped the RUT above the line, which was followed by today's pullback to a close barely below the line. Another bounce on Tuesday would leave today looking like a successful back-test of resistance-turned-support, which would then have us looking for a test of its higher April-June trend line, currently near 1242. The 5th wave of the rally from June 27th would achieve 62% of the 1st wave at 1245 so 1242-1245 is a good upside target zone if the rally continues. Above 1245 would be more bullish.

Key Levels for RUT:
- bullish above 1245
- bearish below 1198

20+ Year Treasury ETF, TLT, Daily chart

After pulling back from its high on July 8th we've seen the bond market trade more or less sideways and it's not clear at the moment if we'll see lower prices before heading higher or just head higher from here. Until TLT drops below 134 I'll continue to look at the pullback from July 8th as a correction within a larger rally pattern but below 134 would be a break below the bottom of its down-channel from July 8th as well as its uptrend line from June-November 2015. Two equal legs down from July 8th, if it's going to pull back further, points to 135, which is close to its February high at 135.25 and therefore I would expect this area to be support if tested. But a rally from here that makes it above the July 29th high at 141.68 would suggest the bond rally will continue (which would drive yields lower).

KBW Bank index, BKX, Weekly chart

The banks have also had a strong rally off the June 27th lows and BKX has now made it up to its downtrend line from July-December 2015, currently near 70 (today's high was 70.45 but it closed at 69.99). This should (in a normal market) be tough resistance on the first test. Time will tell.

Transportation Index, TRAN, Weekly chart

As can be seen on the TRAN's weekly chart below, it continues to struggle with two downtrend lines, one from February 2015 - April 2016, currently near 7980, a downtrend line from August-November 2015, currently near 7880. This morning's high was 7937 but the selloff from there left a shooting star on its daily chart after trying to break through its broken 20-dma and downtrend line (both at 7880). On the weekly chart you can see how little MACD has bounced off its June 27th low while price spiked back up near its mid-July high. The same thing can be seen on its daily chart for the spike back up from August 2nd -- MACD is still stuck at the zero line and therefore neither the weekly nor the daily charts support its rally (although it's important to remember price is king). These indicators suggest most of the rally is likely to be short covering and not strong buying.

U.S. Dollar contract, DX, Daily chart

I normally show the US$'s weekly chart because I don't think there's a lot to pay attention to while it chops around in a $92-$100 trading range since the May 2015 high, which I think will run through the rest of this year. It's not clear yet whether the dollar will head higher from here or if it will first get a larger 3-wave pullback from July 25th but regardless, it would not turn bearish (maybe) until it drops below the bottom of its shallow down-channel from May 2015, near 92.80. But at the moment it's facing potentially strong resistance at its broken 20- and 200-dma's, at 96.43 and 96.63, respectively (it closed today at 96.27 after making a high at 96.42).

Gold continuous contract, GC, Daily chart

For a while I've been showing an upside projection for gold near 1415 for the completion of two equal legs up from December 2015. But after yesterday's sharp spike back down and today's consolidation I'm beginning to wonder if we've seen the high for now. The top of a rising wedge pattern (trend line along the highs from February-July) crosses the 1415 projection the end of next week and therefore it remains a possibility. But the weakening momentum, as shown on the daily chart's MACD, as well as RSI, is not looking so good for gold bulls. It's trying to hold onto its 20-dma, at 1339.20 (today's close was 1341), but if that doesn't hold then it will likely test its 50-dma next, currently at 1310 and rising. A drop below the bottom of the rising wedge (uptrend line from December 2015), currently near 1275, would be more bearish but as long as it holds inside the rising wedge there is the potential for another leg up.

Gold COT report, 2007-July 2016, chart courtesy tradingster.com

A big strike against gold bulls is the COT report, which shows commercial positions vs. non-commercial. Another name for these two would be "smart" money vs. "dumb" money. The message from these two does not necessarily make a good market timing tool but it's always best to keep an eye on this information so as to be aware of risky times to bet against the commercials who are currently in a larger net short position than any time in the last 10 years (as far back as this chart covers). At the same time the non-commercials (you and me, mutual funds, ETFs, etc.) are in their largest net long position in the past 10 years. This is not a good time to betting on the long side for gold.

Oil continuous contract, CL, Daily chart

If a draw a parallel down-channel for the oil's pullback from June's high, the bounce off the August 3rd low made it up to the top of the channel today, as well as the broken 20-dma, both near 43.24. This could be a back-test that will lead to a continuation lower but obviously it would be at least a little more bullish above 43.24 (today's high was 43.39 but closed at 42.87). There is no bullish divergence at the August 3rd low and therefore there's a good chance that low will at least be tested.

Economic reports

There were no economic reports today and there will only be a few Tuesday morning but nothing market moving. Friday will probably be the only morning when there might be some market-moving economic news.


I'm seeing plenty of resistance for the stock market indexes just overhead and that in combination with price projections tells me we could be looking for just one more new high to complete the leg up from June 27th. That in turn could complete the larger rally pattern from February and set us up for a much more significant decline. But a larger bullish pattern cannot be ruled out yet, which calls for just a pullback to correct the rally from June 27th and then continue strongly higher. I have trouble believing in the more bullish scenario but then again I didn't think we'd still be rallying now. Price is king and we'll have to let it lead rather than follow our bias. Just be careful chasing a new high from here since I think there's a very good chance it will be followed by a strong reversal back down, possibly before the week is over.

Good luck and I'll be back with you on Wednesday to see how that "top" is developing (or not).

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

Consumer Spending Casualty

by Jim Brown

Click here to email Jim Brown

Editors Note:

Consumer spending is slowing and retailers of all types are struggling. Six Flags has a secondary problem because the summer season is ending and park attendance will decline with kids back in school.


No New Bullish Plays


SIX - Six Flags - Company Profile

Six Flags Entertainment Corporation owns and operates regional theme and water parks under the Six Flags brand name. The company's parks offer various thrill rides, water attractions, themed areas, concerts and shows, restaurants, game venues, and retail outlets, as well as family-oriented entertainment. It owns and operates 18 parks, including 16 parks in the United States; 1 park in Mexico City, Mexico; and 1 park in Montreal, Canada.

In their Q2 report they only generated earnings of 64 cents that missed estimates for 70 cents. Revenue of $407 million was only slightly above estimates for $406.4 million. The company said it sold $300 million in notes in a private placement and would implement a stock repurchase plan.

The problem for Six Flags is that even with low gasoline prices the 2016 attendance only rose 2% in Q2 despite promotions and discounts. People are not rushing out to theme parks this year like they were in the past. Tickets to similar attractions have become so expensive that consumers would rather spend the money on a new cellphone, video game or clothes. Six Flags is currently discounting tickets from $72.99 to $47.99 in an effort to squeeze a few more customers in before Labor Day. Young adult families are faced with spending $400 for 2 adults and 2 kids for a one-day visit including parking and food. Parking is $23.00 and obviously another way to squeeze you for extra money at the gate. $400 is a lot of money in this economy.

Consumers are also staying away from high traffic locations in fear of a terrorist attack and this is not going to change in the near future. In America we have been fortunate but our time is running out and quite a few consumers are avoiding malls, theaters, concerts and theme parks.

Shares fell $3 on the report and bounced for only one day. A new downtrend has developed and Monday's close was a four month low. Shares have risk to $50 or even $45 depending on the overall market.

Buy December $50 put, currently $1.90. initial stop loss $55.25.

In Play Updates and Reviews

No Follow Through

by Jim Brown

Click here to email Jim Brown

Editors Note:

There was no follow through from Friday's short squeeze but there was no selling either. Apparently investors are unsure about direction. They did not sell to capture their gains and that suggests they believe the market could go higher. Typical short squeezes see profit taking and re-shorting on the following day. That did not happen in Monday's market. It does not mean it will not happen but investors seem to be expecting higher highs.

The high point for the day came at the open but the afternoon selling was lackluster expect in the biotech sector. This sector had supported the Nasdaq for the last two weeks and it fell -1.2% today. If we are about to experience a roll over in that sector the Nasdaq could be in for a volatile week.

Current Portfolio

Current Position Changes

MCD - McDonalds

The long call position was entered at the open.

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

AAPL - Apple Inc -
Company Profile


Apple gained 89 cents despite a press release from a Russian antimonopoly agency saying they were investigating Apple and 16 Russian resellers for price fixing. The agency said there was evidence that multile resellers all sold the iPhone for the same price for an extended period of time. Since Apple sets the recommended price when they announce the phones it would not be a surprise that everyone sold them for the same price. This is just another way Russia extorts money from foreign corporations .

Original Trade Description: August 3rd.

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, education, and enterprise and government customers worldwide. The company offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. The company sells and delivers digital content and applications through the iTunes Store, App Store, iBooks Store, Mac App Store, and Apple Music. It also sells its products through its retail and online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers.

Multiple leaks from vendors now point to an earlier release of the iPhone 7 on September 7th. That is a week earlier than normal and it stems from the iPhone 7 on the 7th. Pre-orders will start on the 9th and the actual first sale date on September 16th. This will give Apple an extra week of sales in Q3 and help boost their revenue for the quarter. I am sure that was also a motive behind the earlier release date. That will help Apple meet earnings and revenue estimates for Q3. Last time around the iPHone 6S and 6S+ did not go on sale until September 25th.

Other leaks confirm Apple is scrapping the 16gb model. The available memory range will no longer be 16/64/126gb but jump to 32/128/256gb. The prices for the 7 are reported to be $649, $749 and $849. The 7 Plus will be $749, $849 and $949. Those numbers roughly equate to a discount of $100 each over the 6s and 6S Plus models because the base memory increment doubled without an increase in price.

Lastly, there are numerous other leaks that suggest Apple is going to announce a brand new iPhone in September 2017 with a massive number of new design features to commemorate the 10th anniversary of the iPhone product. While that will not impact Apple's share price this season it is something to watch in 2017 and we need to get the trade launched immediately after the July earnings.

For this year, Apple shares spiked to $104 on the better than expected earnings. After spending a week consolidating, the shares are starting to move up again. Typically, they rally from early August until the actual announcement then suffer a sell the news event decline. I am recommending October options so there is still some expectation premium left when we exit in early September.

Position 8/4/16:

Long Oct $110 call @ $2.19, see portfolio graphic for stop loss.

GIII - G-III Apparel Group - Company Profile


No specific news. Shares dropped -2% in a weak market.

Original Trade Description: August 3rd.

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It markets swimwear, resort wear, and related accessories under the Vilebrequin brand; footwear, apparel, and accessories under Bass and G.H. Bass brands; and apparel products under Andrew Marc, Marc New York, Jessica Howard, Eliza J and Black Rivet, Weejuns, and other private retail labels. G-III Apparel Group, Ltd. also licenses its products under the Calvin Klein, ck Calvin Klein, Karl Lagerfeld, Guess, Guess?, Kenneth Cole NY, Reaction Kenneth Cole, Cole Haan, Levi's, Vince Camuto, Tommy Hilfiger, Jessica Simpson, Ivanka Trump, Jones New York, Ellen Tracy, Kensie, Dockers, Wilsons, G-III Sports by Carl Banks, and G-III for Her brands, as well as have licenses with the National Football League, Major League Baseball, National Basketball Association, National Hockey League, Touch by Alyssa Milano, Hands High, Collegiate Licensing Company, Major League Soccer, and Starter. The company offers its products to department, specialty, and mass merchant retail stores in the United States, Canada, Europe, and the Far East; and distributes products through its retail stores, as well as through G.H. Bass, Wilsons Leather, Vilebrequin, and Andrew Marc Websites. As of January 31, 2016, it operated 199 Wilsons Leather stores, 163 G.H. Bass stores, and 5 Calvin Klein performance stores. G-III Apparel Group, Ltd. was founded in 1956.

G-III has been on a buying binge the last several years. They are expanding their brands and expanding the marketing of existing brands with license agreements with other companies.

Last week G-III announced the acquisition of the Donna Karan brand from LVMH for $650 million in a combination of cash, stock and notes. Several analysts immediately downgraded the stock saying they paid too much and it would be dilutive to earnings in 2017. The stock crashed from $50 to $38. The Cowen analyst said the price was too high compared to the brand's potential and return on capital from the acquisition.

Donna Karan has a large international presence and G-III is focused on growing its business in the USA. Analysts thought this was the wrong brand at this time. However, G-III believes they can expand the brand globally and especially in the US. G-III Press release I happen to be familiar with it because it was my wife's favorite brand in the 1980s but she had trouble finding it in the US.

I believe G-III will be successful with the brand but we are talking a couple years. We are not going to hold the stock that long. In the short term the stock is oversold and we are going to enter a position to capture a bounce. G-III has a good reputation and they were in a two-month uptrend when the announcement was made. I beleive that trend will return. If the market rolls over investors are going to be looking for stocks that have already been beaten up as potential safe havens. If the market goes higher, eventually investors are going to be looking for stocks that are not over extended. G-III fits the bill on both counts.

Earnings August 31st.

Position 8/4/16

Long Sept $45 call @ 90 cents. See portfolio graphic for stop loss.

Previously closed 8/3/16: Long Sept $45 call @ $1.15, exit .60, -.55 loss.

LCI - Lannet Company - Company Profile


No specific news. Minor decline after a 2.4% rise on Friday.

Original Trade Description: August 4th.

Lannett Company, Inc. develops, manufactures, packages, markets, and distributes generic versions of branded pharmaceutical products in the United States. It offers solid oral, extended release, topical, nasal, and oral solution finished dosage forms of drugs that address a range of therapeutic areas, as well as ophthalmic, patch, foam, buccal, sublingual, soft gel, and injectable dosages. The company provides its products for various medical indications comprising glaucoma, muscle relaxant, migraine, anesthetic, congestive heart failure, thyroid deficiency, dryness of the mouth, gout, bronchospasms, hypertension, and gallstone. It also manufactures active pharmaceutical ingredients. Lannett Company, Inc. markets its products under the Diamox, Lioresal, Fioricet, Fiorinal, Fiorinal w/ Codeine #3, Lanoxin, Levoxyl/Synthroid, Salagen, Benemid, Brethine, Dyazide, and Actigall brands.

The company recently received FDA approval to market Paroxetine extended release tablets in various strengths. Sales of the branded drug in the U.S. last year were over $122 million. There is only one competitor in the market for this drug.

The big news came from the receipt of a FDA Acceptable Filing Letter for Fentanyl patches. The letter allows them to file for approval of the 12mcg/hour, 25mcg, 50mcg, 75mcg and 100mcg patches. This is the generic equivalent of Ortho McNeil's chronic pain treatment Duragesic. According to Lannet sales of the transdermal patches in the U.S. in 2015 were more than $650 million. Lannet partnered with Sparsha Pharma, a specialist in tramsdermal systems, to produce the patches.

Lannet is rapidly increasing its portfolio of generic drugs and sales are booming. This will be a short-term play because earnings are August 23rd. I am looking for a ramp into earnings and we will close the position ahead of that event.

The Sept $35 option is too far out of the money for a short-term position. I am recommending the slightly in the money $30 call. With LCI at $31.78 it is already $1.78 in the money.

Position 8/5/16:

Long Sept $30 call @ $3.40, see portfolio graphic for stop loss.
That is a tight stop because of the ITM strike price.

LL - Lumber Liquidators - Company Description


No specific news. Decent 2.3% gain.

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 returns.

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.

MCD - McDonalds - Company Profile


No specific news. Friday's rally was erased with the Dow's decline.

Original Trade Description: August 6th.

McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. The restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 2015, it operated 36,525 restaurants, including 30,081 franchised restaurants and 6,444 company-operated restaurants. McDonalds was founded in 1940 and is based in Oak Brook, Illinois.

McDonalds has been on a roll recently and set a new high in May at $132. Analysts could not say enough about the turnaround the company was making. Since they went to all-day breakfast items in October the customer traffic has exploded. Unfortunately, all those Egg McMuffins had a negative impact on sales.

The company was selling more items but at cheaper prices. Breakfast items are cheaper than Big Macs and other lunch/supper items. The company reported revenue of $6.26 billion and earnings of $1.45. They beat the $1.38 earnings estimate but missed slightly on the $6.27 revenue estimate. Also, same store sales rose only 1.8% in the U.S. compared to expectations for a 3.2% increase.

Analysts credited part of the revenue shortfall with the industry wide slowdown in the fast food sector. YUM Brands and Starbucks also posted sales declines. Others pointed out that McDonalds sales spiked at the same time Chipotle sales plunged because of their food problems.

Analysts were also quick to point out that international same store sales rose 7.7% in the 100 "foundational markets" covering 100 countries.

McDonalds announced it was farther along in eliminating antibiotics from their chicken, previously targeted for March 2017, had removed the preservatives from the Chicken McNuggets and was removing high fructose corn syrup from its hamburger buns in August. The company is moving in the right direction for long-term improvement.

Analysts believe McDonalds will get control of its all day breakfast menu pricing and will benefit from the longer term menu changes.

Deutsche Bank, Credit Suisse, UBS, RBC Capital and Argus all reiterated their buy ratings with price targets averaging $138.

Earnings Oct 21st.

Shares appear to be rebounding from the post earnings crash. I am recommending the October call just in case we need more time for the post earnings depression to wear off. McDonalds is a Dow component so it will be reactive to the gains and losses in the Dow. With August historically the weakest month for the Dow we could see some volatility in MCD and need the extra time.

Position 8/8/16:

Long Oct $120 call @ $2.71, no initial stop loss.

NVDA - Nvidia - Company Description


Jefferies hiked the price target from $55 to $69 with a buy rating. It is going to be a real struggle to decide on whether to exit this position on Wednesday ahead of earnings. That would be the safe play but everything is very positive for Nvidia at present and they could announce a blowout. Decisions, decisions.

Nvidia was nominated to replace Netflix in the "FANG" acronym. Josh Brown said Nvidia could be the Intel of artificial intelligence, virtual reality and graphics processing.

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.

TASR - Taser Intl - Company Description


No specific news. Shares retreated slightly from Friday's closing high. The stop loss is very tight at $28.45.

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.

XBI - Biotech ETF - ETF Profile


No specific news. Dead stop at the 300-day average.

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.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile


Very minor gain with the Dow closing slightly negative. There was no follow through to the Friday short squeeze.

Original Trade Description: August 1st.

The Dow posted another lower low as it fades from the 18,622 intraday high set back on July 20th. The last three days the Dow has traded under support at 18,400 only to rebound back over that level at the close. The 18,350 level is secondary support and today's low was 18,355.

All but six Dow components have reported earnings and there are only two reporting this week. Those are PG and PFE on Tuesday. The Dow is experiencing post earnings depression. After a stock reports earnings there is typically a period where it declines as traders leave that stock in search of something else to trade that has not yet reported.

PG 8/2
PFE 8/2
DIS 8/9
HD 8/16
CSCO 8/17
WMT 8/18

The Dow is very over extended, suffering post earnings depression and heading into the two weakest months of the year, which are seasonal decliners.

Bank of America expects a 10-15% decline over the next two months.

Goldman Sachs said this morning they expect a 5-10% decline. Goldman said, rising uncertainty in the U.S. and globally, negative earnings revisions, decelerating buybacks and overly dovish Fed expectations would send the market lower over the next several months.

Jeffrey Gundlach of DoubleLine with $100 billion under management, said "sell everything" most asset classes are "frothy and nothing here looks good." "Stock investors have entered a world of uber complacency." "Investors seem to have been hypnotized that nothing can go wrong." He expects the next big money to be made on the short side.

Peter Boockcar, chief market analyst at the Lindsey Group, said, "Take off the beer goggles, the markets are dangerous. To me, the U.S. stock market is the most expensive in the world."

According to Bespoke, over the last 20 years the Dow has performed the worst in August of any other month.

However, just because some big names and big banks turn negative on the market, it does not mean it is guaranteed to move lower. Markets tend to move in the direction that will confound the most people at any given time.

I believe we should accept the risk and launch another index short using the Dow ETF (DIA) since it is the weakest in August. The Dow has risk to 18,000 and a breakdown there could take it back to 17,400.

I am going to recommend an October put spread so we can capitalize on any decline that lasts into September. Typically market bottoms are in October. If you do not want to use a spread, I would buy the September $182 puts, currently $2.55. Just remember, once we are into September the premiums will decline sharply.

Position 8/2/16:

Long Oct $182 put @ $3.98, no initial stop loss.
Short Oct $172 put @ $1.73, no initial stop loss.
Net debit $2.25

IWM - Russell 2000 ETF - ETF Description


The IWM failed at Friday's high and there was no follow through to the short squeeze.

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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