Option Investor

Daily Newsletter, Wednesday, 2/1/2017

Table of Contents

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

Market Wrap

Bulls Weak But Holding On

by Keene Little

Click here to email Keene Little
This week we've seen rally attempts get sold into. But then the morning lows have been followed by a bounce back up and the two things combined has it looking like controlled selling (distribution) and it provides a warning sign. But it doesn't prevent new highs for at least some of the indexes, such as the techs, although it might be a choppy ride higher.

Today's Market Stats

This morning started with a big gap up in the stock market indexes but it was short-lived as the sellers hit almost immediately. Rallies are being sold into but not aggressively. Following the morning selling we've seen the market slowly march back up into the close, even if not to new highs, to set it up all over again. It looks like a distribution pattern with smart money handing off inventory to the retail crowd. We should be doing the same, even if the indexes will be making new highs in the coming week. The market is holding up but is not strong and that's our cue to protect positions while waiting for the green light to play the short side.

This morning's economic reports were not all that encouraging, although the market pretty much ignored them. Mortgage applications were down -3.2% in the past week, down significantly from +4.0% the previous week.

In the pre-market session we received the ADP Employment report and it was much stronger than the expected +165K, coming in at +246K. There was barely a bobble in the futures market.

At 10:00 we received the ISM Index (a little better than expected, at 56.0) and Construction Spending, which was worse than expected. At -0.2% for December, construction spending was down from +0.9% in November and it was the opposite of the expectations for +0.2%. The market was already selling off when this report came out so this was probably ignored as well.

In the afternoon we heard from the FOMC and to no one's surprise they kept the rate the same (0.5% to 0.75%). They believe the economy is still on a moderate growth path and while consumer and business sentiment has improved since the November election they note business investment remains "soft." The market is expecting two more rate increases this year with the first one in June. Nothing in the Fed's statement changes the market's expectations.

The Fed wants to see what becomes of the tax and infrastructure spending plans from Congress and whether or not Trump will be able to successfully push his agenda. By the Fed's next meeting in March they'll have a better idea about what those plans might be. In addition to Congressional tax and spending plans the Fed wants to see if the consumer and business sentiment holds up and improves the economy.

If the Fed wants to raise rates 3 more times this year it was expected they would start dropping hints about when the first one would come, even as early as March. With no hints it has some wondering if the Fed sees trouble ahead and wants more data before even hinting about when to expect the next rate increase. There is of course the possibility that it will be another one-and-done rate increase like 2016.

Helping today's stock market was AAPL's rally following its earnings report last night. Its price shot higher in the after-hours session yesterday and then continued higher most of the day today and was up +9.14 before giving back some in the final hour, finishing +7.40 (+6.1%). While it helped the market, especially the techs, it wasn't enough to thwart some of the selling pressure and other than a small gain for the Dow (+0.1%), it was only the techs that did well today. But AAPL hit an important level today and is now at risk of a reversal.

As can be seen on AAPL's weekly chart below, it has rallied back up to its broken uptrend line from June 2013 - August 2015, which had stopped it previous rally into its September and October 2016 highs. In addition to this trend line there is a price projection at 130.74 for two equal legs up from May 2016 (today's high was 130.49). It's possible that today's rally capped off an a-b-c bounce correction off its May 2016 low that will now be followed by a stronger decline. There is currently no evidence that AAPL is making a high here but the bearish setup is for one (and reason enough to protect positions in this stock). What happens in the next week will tell us more.

Apple Inc., AAPL, Weekly chart

One of the reasons why I suspect AAPL could fall back down (after all, AAPL tells us gravity works) is because I see enough evidence in the major indexes that provide at least a warning sign that the market could be in trouble. I've been thinking we'll see a market high around some coinciding cycle turn dates in the February 8-10 window. That could still be the case and it's reason enough to stay cautious about the short side but the price patterns are not clear enough to suggest either a top is already in place or that we are still due one more new high. Both sides need to be especially cautious here.

I'll start tonight's chart review with a weekly view of the Nasdaq since it's one of the stronger indexes (along with the stronger NDX) but is also showing reasons why we should be very careful about further upside expectations.

Nasdaq Composite index, COMPQ, Weekly chart

I've shown the Nasdaq weekly chart before to point out how it has ridden up underneath the midline of its up-channel from 2010-2011. It has pushed marginally above this midline, which is currently near 5600, but it's also running into the top of a rising wedge pattern for the rally from February 2016. There's a 5-wave move up inside the wedge and the 5th wave is the leg up from November 2016.

The 5-wave move up from February 2016 fits well as the 5th wave of the rally from October 2011, which fits well as the completion of the c-wave of an A-B-C move up from March 2009. In other words the current high has the potential to be a MAJOR top to complete the cyclical bull market off the 2009 low. Upside potential is significantly dwarfed by downside risk and I think it's appropriate to position/protect yourself accordingly.

Nasdaq Composite index, COMPQ, Daily chart

The price pattern for the move up from November is not clear enough to say with confidence that a top is either already in place or still has some more upside to go. We have a rising wedge for the rally from November to complete a rising wedge from February 2016, both of which are bearish patterns and suggest complete retracements of the wedges in a time that will be faster than it took to build the wedges.

Depending on how the top of the larger rising wedge from February 2016 is drawn (from April through either the August or September highs) we have upside potential from 5677 tomorrow up to about 5760 in another week. The top of the rising wedge from November is currently near 5703 and will be near 5730 in another week. I depict a stair-step move higher into next week but I think the risk is for a breakdown at any time.

Key Levels for COMPQ:
- bullish above 5668
- bearish below 5522

S&P 500, SPX, Daily chart

SPX is holding inside a little parallel up-channel for the leg up from December 30th, the bottom of which was tested on Tuesday and as long as SPX stays above its January 23rd low at 2257 it remains potentially bullish for a rally to trendline and Fib resistance near 2321. But the short-term pattern suggests the bulls could be in trouble from here.

We have what looks like a small impulsive move down from last Thursday's high followed by a corrective bounce. At the moment it looks like we have a good setup to be short against this morning's high at 2289. Above 2289 would keep the bullish pattern alive but as with the Nasdaq, there is strong potential for a stronger decline to kick into gear at any time.

Key Levels for SPX:
- bullish above 2301
- bearish below 2257

S&P 500, SPX, 60-min chart

If SPX does manage to push higher into a turn window near February 8th it could happen something like what I've depicted -- another a-b-c move up from Monday to the 2315-2321 area. But as already mentioned, with a corrective looking bounce pattern off Monday's low I think it's important to recognize the bearish potential from here. The next leg down, whether from here or after another quick spike up Thursday morning, would likely be much stronger selling than we've seen so far.

Dow Industrials, INDU, Daily chart

The Dow's pattern is very similar to SPX and looks just as vulnerable to breaking down at any time. But if the cyclical time studies will continue to support the bulls we should see another push higher into at least the February 8-10 time window. Upside potential for the Dow, if they can get some stronger buying going, is near 20400 where it would run into the trend line along the highs from April-December 2016 by next week.

The pullback from last week has been stubbornly holding onto the uptrend line from February-June 2016 (purple line), which acted as support at the January lows and is so far holding as support. But a drop below its 50-dma, currently near 19700, and its January 19th low near 19678, would likely lead to much stronger selling. Between 19675 and 20126 could be filled with a lot of chop and therefore be careful not to get whipped around.

Key Levels for DOW:
- bullish above 20,126
- bearish below 19,675

Russell-2000, RUT, Daily chart

For nearly two months the RUT has been consolidating in a shallow down-channel off its December 9th high. This looks like a bull flag pattern and the expectation is to see a rally out of this. I'll continue to lean this way, which challenges the bearish patterns for the blue chips, until price proves the bullish projection wrong. Upside potential is to the trend line along the highs from 2007-2015, near 1410 next week, but the bulls can't waste any time breaking out of this bull flag pattern.

The first indication of trouble for the bulls would be a drop below the January 23rd low near 1341. But because we could get a 3-wave pullback from last Thursday, with two equal legs down at 1332.71, I'd want to see a drop below 1332 before believing a stronger decline is underway. The risk if you're hoping for higher prices is that what looks like a bullish pattern could fail and failed patterns tend to fail hard. If the indexes have peaked (or we might see some peak while others are already done) I suspect the RUT will lead the way down.

Key Levels for RUT:
- bullish above 1385
- bearish below 1341

30-year Yield, TYX, Daily chart

Treasury yields bounced back up from their January 12th lows but so far to only a lower high vs. their December 12th highs. The 30-year yield, TYX, is again challenging its downtrend line from February 2011 - December 2013 and so far is not having any better luck than December's challenge. If I look at the daily chart below with the log price scale the downtrend line from 2011-2013 is up near 3.25% and I show the possibility for a rally to that level before turning back down. It's not clear yet whether TYX is going to head back down from here or after a little higher but the expectation is for a turn back down.

KBW Bank index, BKX, Daily chart

The banks have been running sideways for as long as the RUT, since the December 8th high for BKX. As with the RUT, the sideways consolidation looks bullish and the expectation is for another rally leg. Upside potential for another leg up this month is to the 100 area and a break above 94 would have me leaning that way. But if the sellers step in and drop BKX below its January 18th low at 89.17 it would look more bearish. Below 87 would tell us an important high is already in place.

Transportation Index, TRAN, Daily chart

The TRAN had a nice 3-day run last week into the high on January 26th. But over the next 3 days it gave it all back and now it's trying to again hold onto its 50-dma, currently near 9165. A loss of support here could spell trouble for the bulls, especially following a double top with its December 9th high and the significant bearish divergence between the two. A breakdown in the Transports would not be a good sign for our economy. A slowing economy would put the Fed on hold, which would have huge ramifications for stocks, bonds, commodities and currencies. Keep an eye on this index.

U.S. Dollar contract, DX, Daily chart

The US$ has been chopping its way lower since the high on January 3rd but it's been a steady decline. It's starting to show some short-term bullish divergence and could be setting up a larger bounce correction into February before continuing lower. I think there's a good chance we'll see the dollar decline over the next few months and drop down to its 200-dma, which coincides with an uptrend line from May-August 2016, currently near 97.30.

Over the next few months I think we'll see the dollar drop down to its 200-week MA, currently at 90.30 and probably near 91 by May where it would also meet a trend line along the lows since early 2015. It will likely be a choppy decline over the next few months, which will make projections difficult, but until I see some bullish evidence that negates the bearish wave pattern I'll stick with the idea that we need one more new low for the dollar before it will be ready for a stronger rally later this year.

Gold continuous contract, GC, Daily chart

Gold remains potentially bullish as long as it holds above its 50-dma, which was tested last Friday. It is again back above price-level S/R near 1205, closing slightly above it the past two days. The bulls need to drive gold above its October low at 1243.20 in order to negate the bearish wave count that calls for another new low before setting up a larger bounce. If gold drops back below its 50-dma, currently near 1176.70, it would be a stronger signal that a new low is coming.

Oil continuous contract, CL, Daily chart

The short-term pattern for oil makes it difficult to make short-term projections but the setup continues to support the idea that we're going to get at least a deeper pullback and potentially something more bearish. But first we need to see oil below the trend line along the highs from October 2015 - June 2016 (bold blue line), currently near 52.45. This line has been acting as support since January 23rd and if it breaks we should see lower prices. A drop below the January 10th low at 50.71 would confirm a breakdown but until that happens there remains upside potential to 57 later this month where it would again run into the top of a parallel up-channel from last August.

Economic reports

There are no significant economic reports Thursday morning. Friday morning's we'll get the NFP numbers, which are expected to be significantly higher than the December numbers. Based on today's ADP report it's looking good for the higher numbers but if they come in lower than expected we could see a negative reaction in the stock market.


The stock market is acting weak. We're seeing evidence of distribution with active selling into rallies. The short-term patterns for the Dow and SPX support the idea that last week's highs were THE highs and we're in the early stages of a more significant selloff.

The rally pattern has been choppy for the techs, which looks like an ending pattern (small rising wedge within larger rising wedges). But the choppy move could extend higher and with a turn window on February 8-10 I continue to look for supporting evidence that the rally will extend higher for another week.

I see a lot of downside risk right now and considering the small amount of upside potential I don't think you have the reward vs. risk in your favor on the long side. There will be better opportunities to trade the long side. Having said that, it's early to be thinking aggressively short.

I did like the setup for a short play following today's bounce off the morning lows but with a stop at the morning highs. This might work better for the blue chips than the techs. But it's a time for caution by both sides until we get a clearer signal to expect either a new high into next week or to abandon the long side and get more aggressive on the short side.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

New Option Plays

Clear Air Turbulence

by Jim Brown

Click here to email Jim Brown

Editors Note:

Sometimes when things seem to going just perfect an unexpected patch of rough air can cause problems. This is what is happening to Hawaiian Holdings, parent of Hawaiian Airlines.


No New Bullish Plays


HA - Hawaiian Holdings - Company Profile

Hawaiian Holdings, Inc., through its subsidiary, Hawaiian Airlines, Inc., engages in the scheduled air transportation of passengers and cargo. It offers daily services on North America routes between the state of Hawai'i and Los Angeles, Oakland, Sacramento, San Diego, San Francisco, and San Jose, California; Las Vegas, Nevada; Phoenix, Arizona; Portland, Oregon; and Seattle, Washington. The company also provides daily services on its Neighbor Island routes among the six major islands of the State of Hawai'i; daily services on its international routes between the state of Hawai'i and Sydney, Australia; and Tokyo and Osaka, Japan. In addition, it offers scheduled services between the state of Hawai'i, and New York City, New York; scheduled services between the State of Hawai'i and Pago Pago, American Samoa; Papeete, Tahiti; Brisbane, Australia; Auckland, New Zealand; Sapporo, Japan; Seoul, South Korea; and Beijing, China, as well as other ad hoc charter services. Hawaiian Holdings, Inc. markets its tickets through various distribution channels, including its Website, www.hawaiianairlines.com primarily for North America and Neighbor Island route customers, as well as through travel agencies and wholesale distributors primarily for its international route customers. As of December 31, 2015, the company's fleet consisted of 18 Boeing 717-200 aircraft for the Neighbor Island routes; 8 Boeing 767-300 aircraft; and 22 Airbus A330-200 aircraft for the North America, international, and charter routes, as well as 3 ATR42 turboprop aircraft. Company description from FinViz.com.

In late January HA reported earnings of $1.28 that missed earnings for $1.30. However, revenue of $633 million did beat estimates for $627.6 million. With fuel costs rising and much of HA routes considered long hauls, their costs are going to rise. Non0fuel costs are expected to rise 3% to 6% in Q1. They are currently negotiating a new contract with pilots and that will cause a rise in labor costs. Costs were already rising in Q4 and investors tanked the stock after earnings.

Earnings April 25th.

Shares have fallen $5 since the January 24th earnings and are hugging support at $50. If that level breaks, the next material support is $45.

Buy March $50 put, currently $2.30, initial stop loss $53.35.

In Play Updates and Reviews

Thank You Apple

by Jim Brown

Click here to email Jim Brown

Editors Note:

Apple's $7 gain added more than 50 Dow points and more than 34 Nasdaq points to keep those indexes positive. With Facebook beating earnings after the close, we could see another positive open on Thursday. The biotech index posted a minor gain of 20 points to lift the Russell almost out of negative territory.

Tomorrow we will have earnings after the close from Amgen and Amazon and two Dow components Merck and Visa with MRK before the open. That sets up Friday to be a potentially volatile day.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

WDC - Western Digital

The long call position was entered at the open.

VIX - Volatility Index

The long call position was stopped at $11.25.

Reload with a trade at $10.50.

If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

PANW - Palo Alto Networks - Company Profile


No specific news. Shares gave back half of Tuesday's gains.

Original Trade Description: Jan 23rd

Palo Alto Networks, Inc. provides security platform solutions to enterprises, service providers, and government entities worldwide. Its platform includes Next-Generation Firewall that delivers application, user, and content visibility and control, as well as protection against network-based cyber threats; Advanced Endpoint Protection, which prevents cyber attacks that exploit software vulnerabilities on various fixed and virtual endpoints and servers; and Threat Intelligence Cloud, which offers central intelligence capabilities, security for software as a service applications, and automated delivery of preventative measures against cyber attacks. The company provides firewall appliances; Panorama, a security management solution for the control of appliances deployed on an end-customer's network as a virtual or a physical appliance; and Virtual System Upgrades, which are available as an extensions to the virtual system capacity that ships with the physical appliances. It also offers subscription services covering the areas of threat prevention, uniform resource filtering, malware and persistent threat, laptop and mobile device, and firewall protection services, as well as cyber attack, threat intelligence, and content control services. In addition, the company provides support and maintenance services; and professional services, including application traffic management, solution design and planning, configuration, and firewall migration, as well as provides online and classroom-style education training services. Palo Alto Networks, Inc. primarily sells its products and services through its channel partners, as well as directly to medium to large enterprises, service providers, and government entities operating in various industries comprising education, energy, financial services, government entities, healthcare, Internet and media, manufacturing, public sector, and telecommunications. Company description from FinViz.com.

In November, PANW posted earnings that beat the street but revenue, which rose 34% missed estimates by a fraction. Revenue was $398.1 million and analysts were expecting $400.1 million. PANW had guided for revenue growth of 33% to 35% so they were right in the middle of their guidance range. Earnings of 55 cents beat estimates for 53 cents. Shares were crushed because the company said the market was "lumpy" and customers were taking longer to make purchase decisions.

In Q3 they added more than 1,500 new customers to hit 35,500 globally. Subscription revenue has risen to 60% of total revenue as they move to a cloud model.

In early January, noted short seller Andrew Left of Citron Research, put out a bullish note on PANW saying they had a fantastic moat, which would be a barrier to entry for other companies trying to duplicate their type of firewall. His price target is $170. Shares rallied $14 over the next three weeks on the call. At the same time Bernstein put out a very positive note on the company saying nobody serious about protecting their web environment should be without PANW as their security solution.

Shares have rebounded to their November gap down level of $144 and have found resistance. They are not giving back their gains but there was a slight retracement on Monday in a weak market. I believe they will overcome this resistance level and move higher, market permitting.

There is a persistent rumor in the market that Microsoft and Cisco Systems are both looking for a cybersecurity company to acquire. Given Palo Alto's position in the sector, they would be a good target.

Earnings February 20th.

Because of the price of the options I am forced to turn this into a spread. If you want to go with a naked call, I would probably use the $150 strike.

Position 1/24/17:

Long March $145 call @ $6.00, see portfolio graphic for stop loss.
Short March $155 call @ $3.15, see portfolio graphic for stop loss.
Net debit $2.85

RHT - Red Hat Inc - Company Profile


No specific news. Only a minor gain but shares are still trying to move higher.

Original Trade Description: Jan 21st

Red Hat, Inc. provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies to various enterprises worldwide. It offers infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in physical, virtual, container, and cloud environments; Red Hat Satellite, a system management offering that helps to deploy and manage Red Hat infrastructure across physical and virtual servers, and cloud environments; and Red Hat Enterprise Virtualization, a software solution that allows customers to utilize and manage a common hardware infrastructure to run multiple operating systems and applications. The company offers application development-related and other technology solutions, such as Red Hat JBoss Middleware, a solution for developing, deploying, and managing applications, as well as integrating applications, data, and devices along with business processes automation; Red Hat cloud offerings, a software solution that enables customers to build and manage various cloud computing environments; Red Hat Mobile, a software development platform that enables customers to develop, integrate, deploy, and manage mobile applications for enterprises; and Red Hat Storage, a software solution that enables customers to treat physical server storage as a scalable, shared, centrally-managed pool of virtual storage and to manage large, unstructured, or semi-structured data in physical, virtual, and cloud environments. It also provides consulting, support, and training services; and real-time operating system, distributed computing, directory services, and user authentication. Company description from FinViz.com.

On December 21st, the company reported earnings of 61 cents that beat estimates by 3 cents. However, the beat came mostly from a lower tax rate. Revenue rose 17.5% to $615.3 million compared to estimates for $618.4 million so a slight miss there. Billings rose 8.7% to $679 million but misses estimates for $713 million. Subscription revenue rose 19% to $543 million and 88% of total revenue. That is recurring and will help smooth out future earnings.

The CEO explained that two large government deals worth $20 million slipped into Q4. Also, two large customers chose to be billed rather than pay up front and that took another $27 million out of billings. If those deals were included the billings would have been up +16% instead of 8.7%. The good news is that all of those deals are now in Q4 and that will give Q4 an earnings boost.

Earnings March 22nd.

Shares have rebounded to $74 and appear poised to break over that level and move back to the $80 range. I am using the March options, which expire 4 days before the earnings and they are half price the next cycle in June.

Position 1/23/17:

Long March $75 call @ $2.35, see portfolio graphic for stop loss.

SLCA - U.S. Silica - Company Profile


No specific news but the earnings date changed from the 2nd to the 21st on the earnings sites but it is still unconfirmed. That is a plus. That gives us 3 weeks of possible gains and then we can decide if we want to exit or hold over. I want to be in this for the long-term so my preference is to hold but we will look at the options again a couple days before the event.

Original Trade Description: Jan 25th

U.S. Silica Holdings, Inc. produces and sells commercial silica in the United States. The company operates through two segments, Oil & Gas Proppants, and Industrial & Specialty Products. It offers whole grain commercial silica products to be used as fracturing sand in connection with oil and natural gas recovery; and resin coated proppants, as well as sells its whole grain silica products in various size distributions, grain shapes, and chemical purity levels for manufacturing glass products. The company also provides ground commercial silica products for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass, and precision castings; and fine ground silica for use in premium paints, specialty coatings, sealants, silicone rubber, and epoxies. In addition, it offers other industrial mineral products, such as aplite, a mineral used to produce container glass and insulation fiberglass; and adsorbent made from a mixture of silica and magnesium for preparative and analytical chromatography applications. The company serves oil and gas recovery markets; and industrial end markets with customers involved in the production of glass, building products, foundry products, chemicals, and fillers and extenders. As of December 31, 2015, it had approximately 400 million tons of proven and probable recoverable mineral reserves. Company description from FinViz.com.

In the gold rush in the 1800's it was not the miners that got rich but it was the companies that sold them the picks, shovels and wheelbarrows. In the energy sector every shale well has to be fractured and that required mountains of sand. We are not talking regular beach sand. The primary frac sand is mined in Wisconsin and other northern states. There are various grades of sand depending on the geology of the well and what the drillers are trying to accomplish.

In 2014 it took an average of 4.2 million pounds of frac sand per well. However, in 2015 and 2016 there was a significant increase in fracking intensity that began to use much larger quantities per well. In late 2015 the amount of sand rose from 9% of the fracking fluid to 20%. In early 2016 Simmons & Co reported two wells in the Permian that used 60 million pounds of sand each while two in the Haynesville Basin used 35 million pounds each.

Houston based oilfield logistics company Twin Eagle reproted receiving "historic shipments" of frac sand at its facility outside the Eagle Ford. They reported receiving one 130-car train of sand a week. One car carries 100 tons so that is 13,000 tons per week. That is 26 million pounds of sand per week. If wells are now using 20 to 25 million pounds per well that is one train per well.

Last week the active rig count rose by 29 oil wells to 551 active oil wells. Each rig drills a minimum of two wells per month. If each well used 25 million pounds that would be more than 1,100 trains of sand per month.

There are rumors making the rounds that because of the increased intensity of sand in fracking there could be a sand shortage as the number of active rigs increase and producers began to rapidly complete the 3,000 or so wells that have been drilled over the last 18 months but never completed because of low oil prices. There is going to be a surge in the demand for sand.

U.S. Silica is one of the major sand suppliers with multiple facilities. They have used the downturn in the drilling industry to buy multiple competitors in order to bulk up for the future demand.

Update 1/31/17: Halliburton selected U.S. Silica as its preferred provider of containerized sand for last mile logistics to drilling locations. They signed a long-term contract with SandBox, a U.S. Silica subsidiary. Shares rebounded to within a few cents of a new high.

Earnings Feb 2nd.

SLCA has earnings on Feb 2nd but almost every company trading today has earnings over the next three weeks so that is just something we have to deal with. I am recommending we buy a longer-term option to get past any potential volatility around earnings. Their guidance should be good.

Position 1/26/17:

Long June $65 call @ $4.10, no stop loss until after earnings.

SPY - S&P-500 ETF - ETF Profile


No material gain. Bounced off resistance at $228.25 and support at $226.50 appears firm.

Original Trade Description: Jan 12th

The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.

The SPY dipped to $225 intraday before the dip buyers rushed into the market. Initial support is $223 and I believe we have a chance to test that level before the inauguration. There are only four trading days left. If the bank earnings disappoint on Friday we could see a decline in low volume. With the three-day weekend ahead we could see traders move to the sidelines to avoid weekend event risk while the U.S. markets are closed.

We could also see a pre inauguration decline as traders worry about event risk surrounding the event.

Whatever the reason we could see the ETF test that level over the next four days. Assuming there is no disaster surrounding the inauguration, we could see a real rally begin afterwards.

This is a short-term position using March options just in case any potential dip turns into a crash. The estimated option premium should be less than $3.

Position 1/25/17 with a SPY trade at $228.25

Long MAR $232 call @ $1.69, no initial stop loss.

$VIX - Volatility Index - Index Description


There was a bad tick at 2:PM where the VIX dropped from 11.50 to 9.97 and then immediately rebounded to 11.50. It was clearly a bad tick but it would have been enough to trigger stop losses and the option did trade on that tick. Fortunately, we only lost 10 cents but we did lose a promising position.

I am suggesting we reload the position if we get a drop to 10.50. While bad ticks are rare they do occur. Also, if the market rallies on Thursday we could see an immediate bleed of the current premiums.

RELOAD: Buy Mar 12 call with a VIX trade at 10.50

Original Trade Description: Jan 26th

The VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option's expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.

The VIX closed at 10.63 and very close to record lows. You have to go back to June of 2014 for a lower recent close at 10.28. Before that, you have to travel back in time to Feb-2007 for a close at 10.05. The next lowest close was 9.48 in Dec-1993.

The point here is that volatility is near record lows only reached four times in the last 23 years. That qualifies for an abnormal event. I believe it is time we bought some VIX calls. The odds of the VIX remaining this low for the next two months are about as close to zero as you can get.

There is a very old saying in the market. "When the VIX is high, it is time to buy. When the VIX is low, it is time to go." You cannot get much lower than this.

The VIX is telling us that everyone expects the market to continue moving higher. Nobody is worried that some unexpected headline or event is going to trigger a significant market decline. When nobody expects an event is when we should be the most concerned.

Position 1/27/17:

Closed 2/1/17: Long March $12 call @ $2.60, exit $2.50, -.10 loss.

RELOAD: Buy Mar 12 call with a VIX trade at 10.50

WDC - Western Digital - Company Profile


Barclay's reiterated a buy rating and raised the price target from $93 to $100. Shares closed at $79.

Original Trade Description: Jan 31st

Western Digital Corporation, together with its subsidiaries, develops, manufactures, and sells data storage devices and solutions worldwide. It offers performance hard disk drives (HDDs) that are used in enterprise servers, data analysis, and other enterprise applications; capacity HDDs and drive configurations for use in data storage systems and tiered storage models, as well as for use in storage of data for years; and enterprise solid state drives (SSDs), including NAND-flash SSDs and software solutions that are designed to enhance the performance in various enterprise workload environments. The company also provides InfiniFlash System, a system solution that offers petabyte scalable capacity with performance metrics; higher value data storage platforms and systems; datacenter software and systems; and HDDs and SSDs for desktop PCs, notebook PCs, gaming consoles, set top boxes, security surveillance systems, and other computing devices. In addition, it offers embedded NAND-flash storage products, including custom embedded solutions; and iNAND embedded flash products, such as multi-chip package solutions that combine NAND and mobile dynamic random-access memory in an integrated package for mobile phones, tablets, notebook PCs, and other portable and wearable devices, as well as in automotive and connected home applications, and NAND-flash wafers. Further, it provides HDDs embedded into WD- and HGST-branded external storage products; and NAND-flash products, which include cards, universal serial bus flash drives, and wireless drives. Company description from FinViz.com.

WDC is kicking butt and taking no prisoners in the disk drive sector. Since the acquisition of flash/NAND memory manufacturer SanDisk, they have upgraded and expanded their product line with additional new products announced almost weekly. SanDisk was the right acquisition at the right time. Today flash memory supply is tight and prices are rising.

The company reported earnings of $2.30 compared to estimates for $2.06. Revenue of $4.89 billion also beat estimates for $4.78 billion. They shipped 44.8 million hard drives in the quarter. The guided for Q1 earnings of $2.00-$2.10, which was above analyst expectations for $1.79. Of the 21 analysts that follow the company, 18 have it as a buy or strong buy. Only 3 rate WDC as a hold. The consensus price target is just under $95 per share with the stock trading at $79.

Earnings April 26th.

Shares traded up on Tuesday in a weak market.

Position 2/1/17:

Long April $85 call @ $2.65, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

DIA Dow ETF - ETF Profile


The Dow managed to remain barely positive but it was a fight. Apple added more than 50 dow points to keep the index in the green.

Original Trade Description: December 7th

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average.

Remember Dow 10,000? Traders talked about it for weeks. When it was finally hit, they were passing out Dow 10,000 hats on the floor of the NYSE for a week. That was December 11th 2003. It was a big milestone for the market.

Now 13 years later, we are about to double that with Dow 20,000. Given the place on the calendar, the massive post election rally and the potential for normal profit taking in January, the Dow 20,000 touch could be a massive sell on the news event.

However, we are only 386 points way and it could happen as soon as next week. The Fed rate announcement on Wednesday could either cripple that potential or accelerate it if the Fed maintains a dovish posture on future rate hikes. I believe we will hit Dow 20K before the end of December. When that happens I want to be short the DIA ETF and plan on holding it through January.

I am choosing the Dow because it is the most overbought and could produce the biggest percentage move. Just look at Goldman's chart and the profit that needs to be removed there.

Because there will be plenty of other traders thinking along the same lines I want to enter the put position at 19,900 or $199 on the DIA ETF. I know I am jumping in front of a speeding train to enter a short position on a runaway market but the potential is very high for a good trade.

Position 12/12/16:

12/12 - 1/2 position: Long Feb $195 put @ $3.40, no initial stop loss.

12/13 - 1/2 position: Long Feb $195 put @ $3.15, no initial stop loss.

FINL - Finish Line - Company Profile


No specific news. Shares are holding up rather well given Under Armour's big earnings miss.

Original Trade Description: January 11th.

The Finish Line, Inc., together with its subsidiaries, operates as a specialty retailer of athletic shoes, apparel, and accessories in the United States. It operates in two divisions, the Finish Line and JackRabbit. The company's Finish Line division engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. This division offers men's, women's, and kids' athletic shoes, as well as an assortment of accessories of Nike, Skechers, Converse, Puma, New Balance, Adidas, and other brands. As of April 2, 2016, the company operated Finish Line shops in 392 Macy's department stores in 37 states in the United States, the District of Columbia, and Puerto Rico. Its JackRabbit division retails lifestyle products, such as running shoes, apparel, and accessories of Brooks, Asics, Nike, Saucony, New Balance, and other brands. It also operates the e-commerce sites jackrabbit.com and boulderrunningcompany.com. The company operated 72 JackRabbit stores in 17 states in the United States and the District of Columbia. Company description from FinViz.com.

In late December Finish Line reported a loss of 24 cents compared to estimates for a loss of 18 cents. Revenue was $371.7 million, down -2.7% from the year ago period. Analysts were expecting $412.4 million. They guided for Q4 earnings of 68-73 cents compared to analyst expectations for 96 cents. Shares fell from $23 to $19 on the news and have continued to decline.

Finish Line does not report earnings again until March 22nd. That means every other retailer will post their disappointing quarters and with each earnings miss the weight should increase on FINL shares.

Finish Line operates mall stores and stores inside Macy's stores. Macy's already reported declining traffic and missed on same store sales. This should also impact FINL since lower Macy's traffic means lower traffic in the shoe section.

Shares are currently $17.50 and could easily break below the June lows before the next earnings reports. I am reaching out to May so there will be some earnings expectation in the premium when we exit before the earnings. We can buy time but we do not have to use it.

Update 1/26/17: Finish Line said it was selling its unprofitable JackRabbit running shoe business to CriticalPoint Capital. The company said it expected to realize a cash tax benefit of $30 million from the sale. Shares declined -28 cents.

Position 1/12/17:

Long May $17 put @ $1.55, see portfolio graphic for stop loss.

GIII - G-III Apparel Group - Company Profile


No specific news. Today's opening spike faded into the close.

Original Trade Description: January 28th

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It operates through two segments: Wholesale Operations and Retail Operations. The company's products include outerwear, dresses, sportswear, swimwear, women's suits, and women's performance wear; and women's handbags, footwear, small leather goods, cold weather accessories, and luggage. 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. Company description from FinViz.com.

The holiday shopping season was not kind to any retailer except for Amazon. Most retailers are reporting negative comps and warning about slowing traffic. GIII was no exception. GIII warned Q4 saw a significant decline in sales that would cut 20 cents off earnings. They guided for the full year 2016 that ended January 31st, for revenue of $2.41 billion and earnings of $1.21-$1.31 compared to their prior guidance of $2.43 billion and earnings of $1.41 to $1.51. For 2017, they guided to earnings of $1.41-$1.51 compared to $2.44 in fiscal 2016.

The company said they were expecting positive comps in Q4 but now expect low double-digit negative comps. That is a heck of a swing. They blamed warmer weather and significantly lower traffic in the stores.

Earnings March 2nd.

Shares broke below support and closed at a three-year low on Friday. Given the trends in the retail sector, they could continue significantly lower with their guidance warning.

Position 1/30/17:

Long March $25 put @ $1.60, see portfolio graphic for stop loss.

QCOM - Qualcomm - Company Profile


Qualcomm said NXP Semiconductor (NXPI) shareholders had approved the acquisition by Qualcomm. The acquisition is expected to be completed by the end of 2017. QCOM will start a new subsidiary in Amsterdam that will actually buy the shares for $110 each. The funding will come from $28.6 billion in cash currently held by Qualcomm overseas. They will not be taxed on the money as long as it is reinvested overseas.

Original Trade Description: January 30th

QUALCOMM Incorporated develops, designs, manufactures, and markets digital communications products and services in China, South Korea, Taiwan, the United States, and internationally. The company operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access (OFDMA), and other technologies for use in voice and data communications, networking, application processing, multimedia, and global positioning system products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of certain wireless products comprising products implementing CDMA2000, WCDMA, CDMA TDD, and/or LTE standards, as well as their derivatives. The QSI segment invests in early-stage companies in various industries, including digital media, e-commerce, healthcare, and wearable devices for supporting the design and introduction of new products and services for voice and data communications. The company also develops and offers products for implementation of small cells; mobile health products and services; software products, and content and push-to-talk enablement services to wireless operators; and development, and other services and related products to the United States government agencies and their contractors. In addition, it licenses chipset technology and products for data centers. Company description from FinViz.com.

Qualcomm it under attack from every direction. A while back China's regulator assessed a $975 million fine for improper licensing and made them lower royalties. The South Korean FTC imposed a fine of $853 million because it found the company's licensing practices to be monopolistic. The KFTC found that Qualcomm's market share had risen from 34% in 2010 to 69% in 2015 while many competitors were forced out of the market.

In early January, the US FTC attacked the company for anticompetitive practices that prevented competitors from supplying chips to handset makers. This is another billion dollar problem.

Three days later Apple sued Qualcomm for $1 billion claiming Qualcomm charged five times as much for licensing than all other cellular patent licensors combined. Apple also claimed the company withheld $1 billion in rebates because Apple had cooperated with KFTC when that investigation was active.

There is blood in the water and there will probably be other suits from companies that suffered under the Qualcomm licensing scheme as well. The odds are also good that Qualcomm will have to change their licensing scheme, which will probably result in lower fees.

With roughly $4 billion in fines and suits over the last few weeks, the investor appetite for QCOM shares has evaporated. Brokers are slashing their ratings from buy to hold or even sell.

Last week the company reported earnings of $1.19 that matched estimates but missed on revenue. They guided for $1.15-$1.25 for Q1 and analysts were expecting $1.17. Other than that the guidance was lackluster with a lot of excuses and questions deflected.

Update 1/31/17: Qualcomm said NXP Semiconductor (NXPI) shareholders had approved the acquisition by Qualcomm. The acquisition is expected to be completed by the end of 2017. QCOM will start a new subsidiary in Amsterdam that will actually buy the shares for $110 each. The funding will come from $28.6 billion in cash currently held by Qualcomm overseas. They will not be taxed on the money as long as it is reinvested overseas.

Earnings April 26th.

Shares have collapsed on the news of the suits and fines and are threatening a steeper decline. Initial support is $50.

Position 1.31.17:

Long March $52.50 put @ $1.68, see portfolio graphic for stop loss.

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