Option Investor

Daily Newsletter, Wednesday, 5/17/2017

Table of Contents

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

Market Wrap

The Market Got Spooked

by Keene Little

Click here to email Keene Little
After being ignored for a long time, the political news surrounding Trump is starting to scare investors who have been content to keep buying as long as the Trump agenda was still possible. That agenda appears to be in trouble and therefore so too might be the rally.

Today's Market Stats

Starting with a sharp decline in equity futures last night, the decline continued today and we had one of the worst selloffs that we've seen since September 2016. Since the rally from November the worst previous selloff was March 21st when SPX lost almost 30 points, vs. today's nearly -44 points. SPX snapped several layers of support today and wiped out in a single day the gains made since April 21st, 18 trading days ago. That follows a quick new all-time high Tuesday morning and it leaves a helluva bull trap up there, near 2406, with today's close nearly 50 points (-2%) lower at 2357.

I'm reluctant to turn the start of tonight's review into a political discussion but obviously it can't be avoided when the reason for today's market decline is based more on the political fighting that's going on rather than anything more market related. Of course the rally from November has been more politically motivated than anything specifically related to the economy or stocks in general. If anything, the environment for stocks has become less supportive of higher prices but hope for what Trump's team was doing kept the rally alive.

The market has been ignoring bad news for a long time, which was actually a sign of strength. Whether it was higher P/E ratios while earnings declined or signs of trouble in the credit markets (default rates are ticking higher) or geopolitical angst, the market didn't care. More trouble? Woohoo, let's rally!

Earnings estimates have been dropping, which has been causing an increase in P/E ratios to historically high levels. The market has been pricing in perfection, whether it was political accomplishments, interest rate changes or geopolitical events and yet all of those conditions have been deteriorating. The market just didn't care but once it does start to care it will then care about historically high P/Es. And if the 'E' is coming down, as it has been for two years (today's earnings are lower than where they were two years ago) then the 'P' will have to come down faster.

As followers of technical patterns in the charts we know that the news will matter when the charts tell us it will matter. The charts have been showing weakening momentum as the indexes hit resistance levels and it was the reason I've been suggesting upside potential is dwarfed by downside risk. The charts have been warning us that we're going to get some kind of news-related event that will suddenly become the catalyst for a correction.

Yesterday's setup for the Nasdaq was an especially strong warning sign even though it closed at its high. We couldn't know what kind of catalyst would provoke some selling but the setup was there, telling us to be very careful about the upside. The same with VIX -- it hit the bottom of its bullish descending wedge last week and started to bounce back up this week, which was a warning sign that something is going to spark a market selloff. We just never know what the spark will be (if we did then it wouldn't be a surprise).

The catalyst for today's decline (starting with a dump in the futures last night) is Trump's potential demise. At least that's the way the media, which hates Trump, is portraying it. There's a lot of false news in the media-inspired frenzy at the moment and as NY Senator Chuck Schumer warned Trump several weeks ago (in so many words), "Don't piss off the intelligence community or else they'll bite back harder." The constant stream of "intelligence" leaks bears out Schumer's warning.

How much all of this political haranguing is real vs. how much is fake news is anyone's guess. But regardless, it's going to affect people's moods and their impression of Trump and his ability to get things done. The rally from November has been based on the changes the Trump administration would be able to make, primarily healthcare reform, tax reform and providing an economic boost through an increase in infrastructure spending.

The healthcare reform is on life support and I'm being kind when I say that. The other reforms and spending plans are in serious jeopardy, especially now that Trump is on the ropes (if you believe the media reports). The Democrats smell blood and are already talking about impeachment hearings. In the end the over-anxious Democrats are probably shooting themselves in the foot because they're forcing Republicans to support Trump, even if reluctantly, and they are the majority party. But that only fans the flames of war between the parties and the mood change from hope to despair will be a rally killer for the market.

The techs have been on a stronger bullish run than the rest of the market and they also led the way down today. The tech indexes lost 2.5% today while the blue chips lost 1.8%. The RUT was also weak, as it has been since December 2016, and it lost 2.8% today. The weakness in the RUT has been another warning sign, especially as it continued to sell off while high-P/E stocks continued to roar higher.

We've had a distorted market for a while and that could continue for longer but a fractured and distorted market is always a time for caution when you're thinking about the upside. It might not be time to aggressively short this market but it's certainly a good time to get defensive about the long side. Bonds rallied strong today, which shows a strong move into the relative safety of bonds. The pattern for bonds supports higher prices so today's move might not be reversed any time soon.

I'll start off tonight's chart review with the VIX since it made a monster move today (up +46%). It's still at a relatively low level (15) but typically a fast move like today's is a sign of "too far too fast" and gets reversed hard the next day. We've seen this time and again during the multi-year stock market rally. I suspect there was a lot of covering of short puts today, especially inside opex week, since many institutions regularly sell premium and then wait for their short puts to expire worthless. It's been a strong income generator since yields have been so low in non-stock assets.

Buying back the short puts is bearish (just like buying puts and shorting stocks, which is also done to hedge short puts) and that's likely one thing that spiked the VIX today. The spike in the VIX could be the kickoff to a much larger pullback/decline in the stock market, especially since we had a nice setup for the reversal. But today's stock market decline looks ready for a bounce correction and that means a likely pullback for the VIX tomorrow.

Volatility index, VIX, Weekly chart

Last week the VIX had dropped back down to the bottom of its bullish descending wedge from 2015 (with confirming bullish divergence since April 2016). I don't know if this is the start of a breakout from the wedge but that's the potential. Today's rally in the VIX now has it testing its downtrend line from August 2015 - November 2016, closing its gap down on April 24th and nearly retracing its decline from April 17th.

The Nasdaq provided a very nice setup into a high yesterday and it's a good index to start a review of the market since it's trading well technically. I'll do a more thorough analysis of the Nasdaq tonight in an attempt to show why yesterday's high is potentially very important.

Nasdaq Composite index, COMPQ, Weekly chart

With the fractal nature of the market, Elliott Wave analysis counts the moves as impulsive (5-wave) or corrective (3-wave or more complex). The move up from 2009 is a 5-wave move and once complete it will be followed by a very large multi-year correction to the rally (potentially something more bearish). It's important to have a good idea where we are in the bull market rally so that extra precaution can be taken when the pattern is telling you to.

As with any of the technical tools available to us, wave counts are somewhat subjective and can be interpreted in different ways. Only after seeing what follows a particular count can the larger count be verified. If the wave count on the weekly chart of the Nasdaq below is correct then we're in the 5th wave of the rally from October 2011 (I'm looking at the rally from October 2011 is the c-wave of a large A-B-C bounce off the 2009 low). The rally from October is in the parallel up-channel shown on the chart.

The 5th wave is now a 5-wave move with an "extended" 5th wave. It's possible we'll see the Nasdaq stair step higher into the end of the year, which would mean just a choppy multi-week pullback before pressing higher again. But the extended 5th wave met a price projection yesterday, at 6167 (with its high at 6170) while hitting a trend line along the highs for the rally from February 2016. The new high was showing bearish divergence against its March 1st high, which was another warning sign.

Nasdaq Composite index, COMPQ, Daily chart

The daily chart of the Nasdaq, shown below, focuses on the latter portion of the 5th wave in the rally from February 2016. The final 5th wave of the move is the leg up from April 13th and it can be seen more clearly how it rallied up to 6167 and its trend line along the highs from April 2016 - March 1, 2017. Yesterday's candle is a hanging man up against resistance, which was a warning sign that it could be followed by a reversal. Today's decline wiped out more than 3 weeks of gains (back to April 25th).

Key Levels for NDX:
- bullish above 6170
- bearish below 6000

Nasdaq Composite index, COMPQ, 60-min chart

The final 5th wave, which is the leg up from April 13th, is shown in more detail on the 60-min chart below. It too will be a 5-wave move and the final little 5th wave is the leg up from May 11th. As it neared the 6167 price projection and the two trend lines along the highs from April 2016 and a shorter-term one from May 1st, it too looked like it was completing a 5-wave move.

I had no idea yesterday what the catalyst for a decline would be but as with the saying, "when the student is ready, the teacher will arrive," so too can it be said "when the market is ready, a catalyst for reversal will arrive."

The multiple degrees of 5th waves completing at the 6167 area led me to believe it would be very strong resistance and the potential completion to the long bull market. That's yet to be proven since it's going to take a lot more price action to see what develops from this high but the potential is for a significant decline to follow.

We could see the Nasdaq drop down to its uptrend line from November-April, near 5985, before setting up a bigger bounce correction but it's also possible the bounce will start from here. It wouldn't surprise me to see a quick flush to the downside Thursday morning and then a snapback reversal to the upside, especially if the uptrend line holds. But once the bounce correction completes, maybe on Friday, we should get another leg down.

S&P 500, SPX, Daily chart

SPX also broke several levels of support, including uptrend lines and its 20- and 50-dma's. It dropped well into its two gaps on April 24th and 25th and basically wiped out the gains made over nearly four weeks. With today's low at 2356 it came within about 7 points of closing its April 24th gap (2348.90). If that gap is closed with a spike down Thursday morning I think it would set up a good reversal back up into a larger bounce correction.

We could see a bounce back up to its 20-dma and broken uptrend line from November-April, near 2386. That would be a nice trade on the long side but I'd then look for another reversal back down into a stronger decline. That's the current setup for this week and into next but obviously subject to change as the market dictates. What the bulls don't like here is the double top against it March 1st high with bearish divergence.

Key Levels for SPX:
- bullish above 2401
- bearish below 2348

Dow Industrials, INDU, Daily chart

The Dow has been weaker than SPX and it has a pattern that is different enough to suggest today's decline could be the completion of a pullback from April 26th. That would be a bullish setup for the resumption of the rally so the bears can by no means feel complacent here. I'm looking for a bounce correction that could see the Dow back up to about 20890 to back-test its broken uptrend line from November-April and its broken 20-dma.

A 62% retracement of the decline from Tuesday would be at 20868. Watch for a possible closure of its April 24th gap, at 20547, Thursday morning to set up at least a bigger bounce. That would also be a back-test of its broken downtrend line from March 1 - April 5, which it had broken above on April 24-25. Below 20547 would be more bearish.

Key Levels for DOW:
- bullish above 21,000
- bearish below 20,000

Russell-2000, RUT, Daily chart

Starting last Thursday through yesterday the RUT kept bouncing off support at its uptrend line from November-April. But that trend line was broken with authority today and the bearish pattern suggests only a small bounce/consolidation on Thursday before heading lower into next week before setting up a larger bounce correction. If it spikes down in the morning and reverses from price-level support near 1347 I would not press bearish bets.

From a strictly price projection perspective, the move down from April 26th achieved two equal legs down today at 1353.60 (actually it stopped 25 cents short of that level) and that could be the completion of a 3-wave pullback correction that will now lead to the start of another rally (or just more sideways chop that the RUT has been in since December).

Key Levels for RUT:
- bullish above 1401
- bearish below 1355

10-year Yield, TNX, Daily chart

With the strong selloff in the stock market today it wasn't surprising to see the Treasury market rallying, which dropped yields. The flight to safety increases demand for the relative safety of Treasuries, driving their prices higher.

A downtrend line from June 2007 - December 2013 for TNX was broken in early December 2016 but it wasn't able to make much headway to the upside after that. It instead formed a double top between December and March near 2.62%, with bearish divergence, and the "valley" between the tops is near 2.3%. The difference between those two levels, 0.32%, becomes the downside projection below the 2.3% floor, which is near 2.0%.

A break below 2.3 in mid-April was followed by a recovery to a lower high and now today's decline is another break below price-level support near 2.3. Today's decline also dropped TNX below support at its downtrend line from 2007 and its uptrend line from July-September 2016, both currently near 2.25. TNX stays bearish below that level but watch for support at its 200-dma near 2.14.

KBW Bank index, BKX, Weekly chart

There were very few sectors that escaped today's selling. The metals, commodities and utilities did well by not selling off, but leading to the downside, and in synch, were the semiconductors and banks. I often say I like to see the SOX and BKX in synch to help support a market move and they both supported today's decline, down -4.4% and -4.1%, resp., which of course is not helpful to the bulls.

The big banks were especially weak, with BAC, GS and MS as examples -- they were down -5.9%, -5.3% and -5.6%, resp. Following the money says we shouldn't even think about getting long but we know moves don't go in a straight line, especially with this market.

BKX has hit potential support at its trend line along the highs from April 2010 - July 2015. BKX broke above this trend line in November, hit the top of its parallel up-channel from 2009 in February-March, came back down for a back-test of its 2010-2015 trend line and then bounced back up to a lower high. Now it's back down to the 2010-2015 trend line, now near 88.40, and my expectation is that support will fail. But never say never to the bulls and now's their chance to rescue the banks.

U.S. Dollar contract, DX, Daily chart

The US$ has been in free fall for the past four trading days, including today. Tuesday's close was marginally below the bottom of a possible bullish descending wedge and a rally today would have left a buy signal.

But instead the dollar has now firmly broken below the bottom of the wedge, currently near 98.20, which leaves a failed bullish pattern in its wake. A failed pattern tends to fail hard so the decline could continue for several more days before we see a correction. The bearish pattern would be in question if the dollar makes it back above 98.15.

Gold continuous contract, GC, Daily chart

The other participant of flight to safety was gold, which finished the day +24.40 (+2%). Just as the stock indexes broke a few support levels in one day, gold also broke a few resistance levels today. It jumped $10 over its 20-, 50- and 200-dma's, all near 1250. It also got back above its broken uptrend line from December-March, currently near 1258.

If the stock market gets a bounce on Thursday we could see gold lose its fight with resistance. If it closes back below 1250 the bearish pattern suggests the start of another leg down. But if the gold bulls can keep up the buying pressure and keep gold above 1260 it will stay potentially bullish (the real test for the bulls will be getting gold above price-level S/R at 1308).

Oil continuous contract, CL, Daily chart

As mentioned earlier, the metals and commodities were beneficiaries of money running out of stocks and looking for a home besides Treasuries. Oil rallied +1.5% today but it's still battling its 50- and 200-dma's, both near 49.30. If the bounce off the May 5th low is just a correction within a larger decline, this is a good place to look for a high and the resumption of the decline. Only slightly higher, at 49.94, is the 62% retracement of the April 12 - May 5 decline. Stronger resistance would be price-level S/R near 51, which would make it more bullish above that level.

Economic reports

The market was not concerned about any economic reports today, not there were any to be concerned about. Thursday's Philly Fed and Leading Indicators will also likely be ignored. There are no major economic reports on Friday. With earnings season winding down and a quiet week for economic reports it's obvious the market went looking for other news. ;-)


The market has been on edge for a while and the market pundits (talking heads) have been beating the drum about why it's different this time and why the market will keep rallying. But with slowing momentum and greater concerns about the economy slowing down, P/E ratios climbing, geopolitical angst, sell in May and go away, etc., it shouldn't be surprising to see the market take a hit. The news really isn't any different today than it's been but the market seems a little more sensitive to it right now.

It's opex week and there could be a big effort to save the week with a rally on Thursday, starting of course with an overnight rally to gap the market up in the morning. That would effectively blow the new shorts back out of the water.

But margin selling could create a gap down in the morning, in which case I think it would probably set up a buying opportunity (for a trade). As reviewed in the charts, there are some potentially strong support levels not far below today's lows and a quick washout in the morning (to get the margin selling out of the way) could lead to a snapback rally.

Whether today's selling was a washout event that will now lead to another rally leg or is instead just the start to a larger decline will be the argument going forward. The large move in VIX suggests at least a snapback correction but I think the market has more work to do on the downside even if it's to be just a pullback before heading higher next month. That means the next large bounce correction should be watched carefully as a shorting opportunity. I don't think the market is done shaking the trees yet.

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

Keene H. Little, CMT

New Option Plays

All In

by Jim Brown

Click here to email Jim Brown

Editors Note:

This headline dip could be a buying opportunity for the right stocks. The FAANG stocks were hit hard but we know there are thousands of traders/investors that have been waiting for an opportunity to enter those stocks on a pullback. When this dip ends we should see those stocks spring back very quickly.

I believe the dip will end quickly. The entire uproar over Memogate and the Russian collusion investigation is political theater. Yes, it is serious but unless somebody produces a tape where Trump threatens to fire Comey if he does not drop the investigation, this will all blow over. Comey has more credibility than Trump but the president has the most power. In a case of "he said, he said" it will boil down to a swearing match and without hard proof it will eventually end. Any testimony Comey gives will be colored by his hostility for Trump and the method of his termination and eventual slander. While I believe Comey is an honorable person, there will be bias in the reporting of the events.

The knee jerk reaction to the headlines should be over. There will probably be some further volatility as margin calls are covered on Thursday. However, if Thursday turns into another bid decline then Friday could be a disaster. Investors who bought the dip today and at the open tomorrow would be racing to the exits if it turns into a market flush.

I am going all in today. If you are a cautious investor, you do not have to add these positions. You are responsible for managing your own risk.

The play descriptions are going to be short because everyone knows these companies. I am not adding stop losses because the market could see significant intraday volatility over the next couple days. Once past this volatility I will add the stops.


NFLX - Netflix - Company Profile

Netflix, Inc., an Internet television network, engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens. The company operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD. It offers members with the ability to receive streaming content through a host of Internet-connected screens, including TVs, digital video players, television set-top boxes, and mobile devices. The company also provides DVDs-by-mail membership services. It serves approximately 100 million streaming members in 190 countries. Netflix, Inc. was founded in 1997 and is headquartered in Los Gatos, California. Company description from FinViz.com.

Netflix posted blowout earnings and shares rocketed higher to hit $161 on Monday. I have been waiting for three weeks for a pullback. Analysts are projecting higher highs with the high price targets at $175. There have been continuous rumors that either Disney or Apple will try to buy them not only to acquire the platform but to keep the other company from acquiring it. Both have said they want to have a big presence in streaming. Tim Cook just said it last week. Both have the cash and Disney has billions of dollars in content it can immediately add to the platform.

Netflix is expected to add 3 million subscribers in Q2. They are testing higher prices in Australia to see what price levels will cause subscriber flight. Once they figure it out you can bet they will apply it to the rest of their 100 million customers. That is instant profit. Bumping rates by $5 gets them another $500 million a month in revenue.

They announced with earnings they were finally entering China through a partnership with the largest existing streamer in China. This is one more step to a full release in the future.

Earnings July 17th.

We have to use a spread because options are still expensive.

Buy July $160 call, currently $6.25, no initial stop loss.
Sell short July $175 call, currently $1.84, no initial stop loss.
Net debit $4.41.

FB - Facebook - Company Profile

Facebook, Inc. provides various products to connect and share through mobile devices, personal computers, and other surfaces worldwide. Its solutions include Facebook Website and mobile application that enables people to connect, share, discover, and communicate each other on mobile devices and personal computers; Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application to communicate with people and businesses across platforms and devices; and WhatsApp Messenger, a mobile messaging application. The company also offers Oculus virtual reality technology and content platform, which allow people to enter an immersive and interactive environment to play games, consume content, and connect with others. Company description from FinViz.com.

Facebook also blew away earnings estimates and they are growing earnings at the fastest rate of any of the FAANG stocks. They have multiple revenue streams and sites like Instagram and WhatsApp that are just starting to accelerate earnings. They said Instagram had reached 50,000 advertisers. Facebook's problem is they do not have enough page views to monetize despite the 1.9 billion users. They have more advertisers than they have space.

Earnings August 2nd.

Facebook had been moving sideways since hitting the $153 high post earnings. Volatility was low and investors were just waiting for a market dip so they could get a better entry point. Share fell to uptrend support at $145 and even if they due decline further there is strong support around $140.

Buy Aug $150 call, currently $4.90, no initial stop loss.

IWM - Russell 2000 ETF - Company Profile

The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities.

The Russell 3000 is the top 3,000 investible stocks in the U.S. The Russell 1000 is the top 1,000 stocks by market cap and the Russell 2000 is the next 2,000 stocks by market cap. The Russell 2000 is commonly called the small cap index but it has a large number of midcap stocks as well.

The Russell 2000 imploded with a 39 point, -3% decline to 1,355. There is strong support at 1,344. "IF" the market rebounds as I expect the Russell is likely to rebound strongly now that all the stop losses have been hit.

The corresponding level on the IWM is $134 with the ETF closing at $134.89 on Wednesday. This support has held since January despite six intraday penetrations that were immediately bought.

Buy July $136 call, currently $3.15. No initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Peak Insanity

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P and Dow crashed through multiple levels of light support and came to rest at a technical buy point. The Dow stopped at 20,600 and the S&P just over 2,350. Both levels should be decent support as long as some new revelation does not appear.

The Nasdaq fell -158 points and erased nearly a month of gains. The Russell 2000 lost 39 points and came to rest just above strong support.

Futures are up slightly in the evening session. I lowered the stop losses on a couple of positions just in case we get a bit of follow through at the open on Thursday as the margin calls are covered. We were only stopped on one position and I am recommending we reload it on a rebound.

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

FFIV - F5 Networks
The long call position was stopped at $128.65. We will reload.

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

ATHN - AthenaHealth - Company Profile


No specific news. Monster drop with the market but no change in the recommendation.

Original Trade Description: May 13th.

athenahealth, Inc., together with its subsidiaries, provides network-based medical record, revenue cycle, patient engagement, care coordination, and population health services for medical groups and health systems. It offers athenaCollector, a network-enabled billing and practice management solution; athenaClinicals, an electronic health record for electronic health record management to help manage patient's clinical documentation; athenaCommunicator, an engagement and communication solution that provides an automated communication service between patients and provider practices for interactions outside the exam room; and athenaCoordinator for order transmission and care coordination services. The company also provides athenahealth Population Health, a cloud-based population health service; and Epocrates service that include clinical information and decision support services in the areas of drug and disease information, medical calculator and tools, clinical guidelines, clinical messaging, and market research. In addition, it offers athenahealth Health Plan data exchange facilitates to exchange the data between providers and health plans for the healthcare operations of clients; athenaOne Analytics that includes an analytics and dashboard application, as well as provides visibility into the financial and operational health of an organization; and pre-certification processing and referral processing services. The company serves clients in the health care industry through its direct sales force and channel partners in the United States and internationally. athenahealth, Inc. was formerly known as athenahealth.com, Inc. and changed its name to athenahealth, Inc. in November 2000. Company description from FinViz.com.

ATHN shares fell from $121 to $95 after reporting slower than normal growth in the first quarter. The company reported earnings of 32 cents compared to estimates for 46 cents. Revenue of $284.4 million rose 11% but missed estimates for $296.6 million. ATHN has averaged 20% growth in the past and the slowdown hammered the stock. They guided for the full year for revenue of $1.21 to $1.25 billion.

There was good news. They added 2,406 new providers of its Collector software. They added 2,791 providers using their Clinical software system. The hospital software segment saw 86% growth in discharged bed days. Covered lives rose 25% to 2.8 million. They handle 88 million patient records and now have more than 99,000 providers.

The lower earnings came from a 13% increase in expenses, mostly due to an aggressive research and development effort, which will increase profits later.

Earnings July 27th.

Analysts believe ATHN was surprised by the lower growth in Q1 and they drastically lowered guidance to avoid missing estimates again in the future. This is the under promise and over deliver tactic.

Shares have been rebounding strongly since the drop. Even on weak market days, they continue to post gains.

Because of the positioning of share price and option strikes, I am recommending a spread using the June options. This will limit our potential gain but also limit out cost and risk. There are no July/August options and the September options are far too expensive.

Position 5/15/17:

Long June $110 call @ $4.30, see portfolio graphic for stop loss.
Short June $115 call @ $1.85, see portfolio graphic for stop loss.

CGNX - Cognex Corporation - Company Profile


No specific news. Big drop with the market.

Original Trade Description: May 10th.

Cognex Corporation provides machine vision products that capture and analyze visual information in order to automate tasks primarily in manufacturing processes worldwide. The company offers machine vision products, which are used to automate the manufacturing and tracking of discrete items, such as mobile phones, aspirin bottles, and automobile tires by locating, identifying, inspecting, and measuring them during the manufacturing or distribution process. Its products include VisionPro, a software suite that provides various vision tools for programming; displacement sensors with vision software for use in 3D application; In-Sight vision systems that perform various vision tasks, including part location, identification, measurement, assembly verification, and robotic guidance; In-Sight vision sensors; ID products, which are used for reading codes that are applied on discrete items during the manufacturing process, as well as have applications in logistics automation for package sorting and distribution; DataMan barcode readers; barcode verifiers; vision-enabled mobile terminals for industrial barcode reading applications; and barcode scanning software development kits. The company sells its products through direct sales force, as well as through a network of distributors and integrators. Company description from FinViz.com.

Cognex reported earnings growth of 200% to 51 cents. Revenue growth increased 40% to $134.9 million and well over guidance of $123.5 million. Gross margin was 79%. Operating income rose 128% to $37.4 million. Operating margin rose from 17% to 28%. The company raised guidance for Q2 for revenue in the $165-$170 million range or roughly 13.7% growth.

Earnings July 31st.

The CEO said growth across all regions were better than expected. Factory automation in the America's increased by mid-teens percentages and was expected to improve. Growth across a range of industries including consumer electronics and automotive were better than expected. Automotive related revenue rose 20% in the quarter.

There are no negatives in the Cognex story. Shares spiked to $90 on the earnings, a new high, and have held there for the last six days. Wednesday's close was a new high and it looks like a breakout is imminent.

Position 5/11/17:

Long August $95 call @ $3.70, see portfolio graphic for stop loss.

CNC - Centene Corp - Company Profile


No specific news. Excellent relative strength.

Original Trade Description: April 28th.

Centene Corporation operates as a diversified and multi-national healthcare enterprise that provides programs and services to under-insured and uninsured individuals in the United States. It operates through two segments, Managed Care and Specialty Services. The Managed Care segment offers Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs, including Medicaid, the State children's health insurance program, long-term care, foster care, and dual-eligible individual, as well as aged, blind, or disabled programs. Its health plans include primary and specialty physician care, inpatient and outpatient hospital care, emergency and urgent care, prenatal care, laboratory and X-ray services, home health and durable medical equipment, behavioral health and substance abuse, 24-hour nurse advice line, transportation assistance, vision care, dental care, immunizations, prescriptions and limited over-the-counter drugs, specialty pharmacy, therapies, social work services, and care coordination. The Specialty Services segment provides pharmacy benefits management services; health, triage, wellness, and disease management services; vision services; dental services; correctional healthcare services; in-home health services; and integrated long-term care services, as well as care management software that automate the clinical, administrative, and technical components of care management programs. This segment offers its services and products to state programs, healthcare organizations, employer groups, and other commercial organizations. The company provides its services through primary and specialty care physicians, hospitals, and ancillary providers. Company description from FinViz.com.

Centene reported earnings of $1.12 compared to estimates for $1.05. Revenue jumped 69% to $11.72 billion to beat estimates for $11.42 billion. The big spike in revenue came from the $6.3 billion acquisition of Health Net last year.

The insurer said it had 12.15 million members on March 31st, an increase of 605,000. They raised guidance for the full year from $4.40-$4.85 to $4.50-$4.90. The health benefits ratio or HBR, the amount it spends on claims compared to the premiums received declined from 88.7% to 87.6%. The lower HBR is due to a greater mix of commercial businesses and the growth of its Obamacare businesses.

Earnings July 25th.

Shares had resistance at $73, which was broken last week. The next resistance is the 52-week high at $75.50 and the stock closed at $74.41 on Friday. There was a sell the news drop on Wednesday after the earnings but shares have already recovered $3 of that decline.

If the stock moves to a new 52-week high is should continue on to make a new high over $80.

Position 5/1/17:

Long June $77.50 call @ $1.57, see portfolio graphic for stop loss.

CVX - Chevron - Company Profile


No specific news. Strictly market related decline. Inventories fell, oil prices rose. This could be a buying opportunity.

Original Trade Description: April 16th.

Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses. Further, the company holds interests in power plants, as well as operates geothermal plants; and engages in the transportation of refined products primarily in the coastal waters of the United States. The company was formerly known as ChevronTexaco Corporation and changed its name to Chevron Corporation in 2005. Company description from FinViz.com.

Chevron is one of the U.S. energy majors with billions of barrels of reserves. The company pays an annual dividend of $4.32 or 4.07% yield. They are totally committed to preserving and raising the dividend. This makes them a top pick by nearly every major analyst.

Chevron is coming out of a major project cycle where they spent over $25 billion a year on capex building out monster projects. Now that the projects are nearly complete and ramping up production, the company can reduce its capex significantly and still increase production as those projects come online.

Chevron has amassed a two million acre position in the Permian Basin with 9 billion barrels of reserves. The company is currently operating 11 rigs in the Permian and will be adding 9 more in the coming months. They plan on ramping up their Permian production from the current 80,000 bpd to 700,000 bpd over the next few years. Chevron's Permian acreage is said to be worth more than $43 billion. It was acquired in pieces at much lower prices by predecessor companies over the last several decades. The Permian was never a big focus for Chevron as they concentrated on megaprojects elsewhere. They are increasing spending in the Permian by $2.5 billion in 2017. They are not hedging their oil production because they believe prices will rise.

Earnings on April 28th are expected to be a miss because of the sharp decline in oil prices in March. This is expected to lower earnings and force misses for the major producers. Since this is a well-known fact, I suspect it it being priced into the stock ahead of the report.

Thursday's decline of 3% put the stock right at light support at $106. If this level fails, there is strong support at $100.

Oil prices should begin to rally any day now. Refinery utilization of back over 90% and it is time to begin pushing summer blend fuels into the distribution system. We should begin to see inventory declines every week and that should last through July. August is normally when crude prices top out. OPEC should extend the production cuts because they are right on the edge of a reduction in inventories and an extension would guarantee it.

Chevron shares should rebound with crude prices. If they were to surprise with earnings, shares should rebound quickly.

The option is cheap and we are going to hold over the earnings report.

If the market tanks at the open on Monday, please do not enter this position until the S&P is positive.

Update 4/19/17: Chevron shares crashed with the entire energy sector after a nearly $2 drop in crude prices on weak inventory numbers from the EIA. WTI only declined -1 million barrels and gasoline rose 1.5 million compared to an expected decline of -1.6 million. The EIA said gasoline demand was down -0.8% from the same period in 2016.

Update 4/22/17: Chevron lost a court case in Australia for $260 million. The case ruled on the deductibility of interest on a $2.5 billion loan made from the parent company between 2003-2008. Chevron Australia paid 9% interest on the loan from Chevron and the parent company borrowed the money at a lower rate. The court said Chevron Australia could only deduct the interest at the parent's borrowing rate. Chevron said they would appeal.

Update 4/24/17: Chevron said it was selling its assets in Bangladesh to Himalaya Energy. No price was given but Bloomberg said the fields were worth about $2 billion. Chevron is planning on selling $10 billion in non-core assets in 2017. Himalaya is owned by a consortium of Chinese state owned firms. Bangladesh has a right of refusal on any deal and they said they were not done with their evaluations yet. The three fields held in the Chevron subsidiary produce 720 million cubic feet of gas and 3,000 barrels of condensate per day.

Update 4/28/17: Chevron reported earnings of $1.41 compared to estimates for 86 cents. The Chevron number did have a $600 million gain from the sale of an upstream asset so it is not really apples to apples comparison. Revenue of $33.4 billion missed estimates for $34.9 billion. Operating costs declined 14% and capex spending will be down more than 30%. Oil production rose 3% and full year growth is expected to be 4-9%.

Udate 5/15/17: Chevron said they had taken Train 1 of the massive Gorgon LNG plant offline for a month to do some maintenance. The plant cost $54 billion to build and has 3 trains that can produce 15.6 million tonnes of LNG per year.

Position 4/17/17:

Long June $110 call, currently $1.45. See portfolio graphic for stop loss.

FFIV - F5 Networks - Company Profile


No specific news. The drop was strictly market related. We were stopped at $128.65. I am recommending we reenter the position with a trade at $130.

Buy July $135 call with FFIV trade at $130.

Original Trade Description: May 8th.

F5 Networks, Inc. develops, markets, and sells application delivery networking products that optimize the security, performance, and availability of network applications, servers, and storage systems. It offers Local Traffic Manager, which provides intelligent load-balancing, traffic management, and application health checking; BIG-IP DNS that automatically directs users to the closest or best-performing physical, virtual, or cloud environment; Link Controller, which monitors the health and availability of each connection in organizations with more than one Internet service provider; Advanced Firewall Manager, a network firewall; and Application Security Manager, an Web application firewall that provides comprehensive, proactive, and application-layer protection against generalized and targeted attacks. The company also provides Access Policy Manager, which provides secure, granular, and context-aware access to networks and applications; Carrier-Grade Network Address Translation, which offers a set of tools that enables service providers to migrate to IPv6 while continuing to support and interoperate with existing IPv4 devices and content; and Policy Enforcement Manager that offers traffic classification capabilities to identify the specific applications and services to service providers. In addition, it offers cloud-based and other subscription services; BIG-IP appliances; VIPRION chassis-based systems; and Traffix Signaling Delivery Controller for diameter signaling and routing. The company sells its products to enterprise customers and service providers through distributors, value-added resellers, and systems integrators in the Americas, Europe, the Middle East, Africa, Japan, and the Asia Pacific Region. Company description from FinViz.com.

F5 reported earnings of $1.95 that missed estimates for $2.09. Revenue of $518.2 million rose 7% but missed estimates for $538 million. The company had guided for earnings of $2.01 to $2.04. They beat their own guidance but analysts were too optimistic.

The company blamed the miss on continued weakness in Europe. Sales rose 16% in the Asia Pacific region.

F5 began shipping some new products in Q1 but the volume shipments will hit in Q2. They also announced additional products that will also be shipping in Q2, which should be a good quarter. They guided for current quarter revenue of $520-$530 million with earnings of $2.01-$2.04.

Earnings July 26th.

Shares of F5 fell from $138 to $125 on the earnings miss on April 27th. After a week of post earnings depression, shares are now rebounding.

Position 5/9/17:

Closed 5/17/17: Long July $135 call @ $2.75, exit $2.01, -.74 loss.

RELOAD: Buy July $135 call with FFIV trade at $130.

MCD - McDonalds - Company Profile


Only a minor decline. MCD will come roaring back when the market weakness is over.

Original Trade Description: May 3rd.

McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, Latin America, and internationally. The company's restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 31, 2016, it operated 36,899 restaurants, including 31,230 franchised restaurants comprising 21,559 franchised to conventional franchisees, 6,300 licensed to developmental licensees, and 3,371 licensed to foreign affiliates; and 5,669 company-operated restaurants. McDonald's Corporation was founded in 1940 and is based in Oak Brook, Illinois. Company description from FinViz.com.

McDonalds is surging because they have overhauled their menu, offered breakfast all day, shifted to fresh beef, mobile ordering, delivery with UberEats, kiosks AND they are selling coffee for $1 and specialty drinks for $2. That is vastly lower than Starbucks and it is helping them steal market share. People stopping by to pick up a cheap coffee tend to order a snack as well. Who can resist adding an Egg McMuffin to go with that coffee.

McDonalds reported better than expected earnings and raised guidance. They reported $1.47 compared to estimates for $1.33. Revenue of $5.68 billion beat estimates for $5.53 billion. Same store sales rose 1.7% compared to expectations for an 0.8% decline. Global sales were up 4%.

Earnings July 25th.

Goldman has had a neutral rating on them forever but upgraded the fast food giant today to a buy with $153 price target. Goldman admitted they were late but said there was still plenty of time given the improved metrics. Goldman cited McDonald's "Experience of the Future" plans for mobile ordering and kiosks and said the expanding delivery options could expand revenue.

McDonalds closed at a new high today in a weak market.

Update 5/4/17: McDonalds said it was adding Signature Crafted Recipes to its stores in Florida and would be adding 5,000 workers to handle the volume.

Update 5/15/17: McDonald's Bar-B-Que opened on May 15th, 1940. The store closed and was later reopened in 1948 with only 9 items on the menu. Hamburgers were 15 cents, cheeseburgers 19 cents and cokes/coffee were 10 cents. Today, McDonalds serves 77 million customers a day. Short history of MCD in pictures The stock celebrated today with a new high.

Position 5/4/17:

Long July $145 call @ $1.67, see portfolio graphic for stop loss.

$VIX - Volatility Index - Index Description


Monster 46% spike in the VIX. I was tempted to close the position for a minor gain after being negative for so long. However, if the market opens lower on Thursday, we could see much higher numbers. Target $18 for an exit.

The May 8th close at 9.77 was the lowest close since December 1993. That is a 24 year low!!

This is a July call. We have plenty of time and the odds of a market sell off over the next 2.5 months are close to 100%. The VIX cannot go much lower but it can go a lot higher.

While holding the VIX call is an insurance play for us, I hope we are never in a position to profit from it. That would mean a lot of our long positions would be under water or stopped out.

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.

Update 5/1/17: The VIX made a new intraday low at 9.90 and closed at a 10-yr low at 10.11. The government shutdown has been avoided according to reports out of Washington and that helped to deflate the VIX. Marine Le Pen is rapidly gaining on Macron in the French election runoff for next Sunday. She gained 6 points in two days to 41% in the recent polls compared to Macron's 59%. If she can gain another 6% early this week then the entire event risk scenario comes back into play with a potential come from behind win.

Position 3/30/117
Long July $14 call @ $2.55, no stop loss.
Added 5/9/17: Long July $14 call @ $1.60, no stop loss.
Average cost now $2.07.

Previously Closed 2/1/17: Long March $12 call @ $2.60, exit $2.50, -.10 loss.
Previously Closed 2/22/17: Long March $12 call @ $1.75 adj, exit $1.65, -.10 loss.
Previously Closed 4/10/17: Long Apr $13 call @ $2.30, exit $1.80, -.55 loss.

BEARISH Play Updates (Alpha by Symbol)

SPY - S&P-500 SPDR ETF - ETF Profile


I brought the SPY put play back because of the potential for another drop on Thursday. It would take another 400 point decline to get us back to even but at least we might be able to recover some premium. I would target 50 cents for an exit but watch for another implosion. If Thursday is also negative, Friday could be a disaster. That might inflate the premiums Thursday afternoon but I would definitely close on Thursday. There is no future in holding an expiring out of the money option on expiration day.

Original Trade Description: March 25th.

The SPDR S&P 500 trust is an exchange-traded fund which trades on the NYSE Arca under the symbol. SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index.

The S&P-500 is in danger of a material drop, possibly to 2,250 or the equivalent 225 level on the SPY ETF. The chart is unsupported and we are entering into a typically volatile period of the year over the next five weeks. I am recommending we buy insurance with a put on the SPY only IF the SPY trades at a new five-week low of 232.75. That way if the market opens higher on Monday we can watch to see if that direction holds before putting money at risk.

I believe if the market goes lower next week it could be the beginning of a major decline.

Position 3/27/17:

Long May $230 put @ $3.49, see portfolio graphic for stop loss.

TSCO - Tractor Supply - Company Profile


No specific news. Not as big of a decline as I would have expected.

Original Trade Description: May 15th.

Tractor Supply Company operates rural lifestyle retail stores in the United States. The company offers a selection of merchandise, including equine, livestock, pet, and small animal products necessary for their health, care, growth, and containment; hardware, truck, towing, and tool products; seasonal products, such as heating products, lawn and garden items, power equipment, gifts, and toys; work/recreational clothing and footwear; and maintenance products for agricultural and rural use. As of January 26, 2017, it operated 1,600 retail stores in 49 states. The company operates its retail stores under the Tractor Supply Company, Del's Feed & Farm Supply, and Petsense names. It also operates an e-commerce Website, TractorSupply.com. The company sells its products to recreational farmers, ranchers, and others, as well as tradesmen and small businesses. Tractor Supply Company was founded in 1938 and is headquartered in Brentwood, Tennessee. Company description from FinViz.com.

In mid April TSCO warned that sales were weak and cut its earnings outlook. Same store sales fell -2.2%. The average number of transactions declined -1.4% and the average ticket size fell -0.9%. The company blamed price deflation from competition and lower sales of seasonal merchandise. They cut estimates from 49 cents to 45-46 cents.

The company has been around since 1938. Have they not gotten a grasp of weather patterns yet?

When they reported earnings of 46 cents that matched the lowered analyst estimates. Revenue rose 6.6% to $1.56 billion.

Let make sure we have this right. In Mid April, they warned of lower sales for multiple reasons and cut earnings estimates. Two weeks later, they reported a 6.6% increase in sales rather than a decrease. Other investors picked up on the discrepancy and shares began to fall. Since Amazon does not sell tractors online, somebody else is forcing their profits lower. Maybe the sale of big ticket items like tractors is suffering from the same illness as motorcycles and motor homes. A lack of extra money in consumer pockets.

The next earnings release is July 26th.

I am going to step out to the October strikes because the July options would expire before earnings. It would be best to have some earnings expectation in the premium to keep them elevated.

We can buy all the time we want. We do not have to use it. We will exit before earnings.

Position 5/16/17:

Long Oct $55 put @ $1.95, see portfolio graphic for stop loss.

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