Option Investor

Daily Newsletter, Wednesday, 7/19/2017

Table of Contents

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

Market Wrap

Another Bullish Opex (so far)

by Keene Little

Click here to email Keene Little
It's a rare event when opex is not bullish and this one is no exception to the pattern. But the bulls will need to shoo the bears away on Thursday and Friday in order to prevent a possible topping pattern.

Today's Market Stats

All-time highs beget new all-time highs. That's basically the message from the market and the market pundits. Momentum is weakening and the gains are slowing but they're still gains. And the new all-time highs get people excited and want to join in before missing the ride higher.

The excitement about new highs and a typically bullish opex has the market's major indexes pushing higher this week and that could continue into at least August. But as always, there are some reasons why it might pay to be careful about chasing the market higher from here. I'll explore some of the reasons for caution in tonight's charts.

Helping the market push higher is a strong advance-decline line, which shows liquidity is plentiful as more money/investors chase the market higher. It's one of the few places where people are happy to buy something at the highest price in hopes they'll be able to sell someday at an even higher price, which is why high prices often beget higher prices.

But as we all know, chasing the market higher has its own risks, one of which is the fact that the buyers at the highs could be left holding the bag. Whether or not we're there is arguable and certainly the bears know that shorting a market that "shouldn't be rallying" is a recipe for disaster.

We have no indications that the market could even be close to an important high and while I believe we could be, it's important to remember that setups for a high are far different than confirmations of a high. For those who love to enter a short position at top tick or get long at bottom tick, the vast majority of traders are unable to do that. When it happens it's usually pure luck while it's much more common for bottom and top pickers to sustain trading losses. And those are not made up in volume (wink).

Having said all that, I'll show in tonight's charts why it might be a good time to pick a top, ideally with one more thrust higher Thursday morning that is then reversed and the day finishes with a bearish candlestick, such as a shooting star. This is obviously speculation but it's something that would help confirm a possible high.

Coming into this week I liked the price patterns on the indexes for a high in opex week. I thought we could see a high by Friday, maybe next Monday, and that would also coincide with a new moon this coming Sunday. I've noticed many important highs on new moons (+/- 3 days) so we have that possibility.

It was a slow news day so there's not much to discuss about why the market is doing what it's doing so I'll just jump into the review of the charts, starting with a weekly view of SPX.

S&P 500, SPX, Weekly chart

Again, sorry for the busy weekly chart but important price levels and trend lines are shown and SPX has now reached the bottom of a potentially important price zone. With today's high near 2474 SPX is within less than a point from a price projection at 2475, which is where the 3rd through 5th waves of the rally would equal 162% of the 1st wave.

A rally much above 2475 would open the door to two price projections near 2507 and 2516. Considering SPX typically closes opex week around a multiple of 25, I was thinking we'll see a close near either 2475 or 2500 and we'll find out in the next two days which it will be.

S&P 500, SPX, Daily chart

The wave pattern for the rally from either the March of April low have price projections that are essentially on top of each other at 2475.54 and 2476.91. These shorter-term price projections line up nicely with the weekly projections and with a wave count that can be considered complete at any time now, it will be important for the bulls to power this index up through 2477 to open the door to 2500.

Key Levels for SPX:
- bullish above 2477
- bearish below 2410

S&P 500, SPX, 60-min chart

Drilling in closer to the price pattern, the leg up from July 6th is likely the final one for the rally from March/April, which should conclude the rally from January 2016. So it's a potentially important top that could be made. The rally from July 6th is a 5-wave move and the 5th wave equals the 1st wave at 2474.64, about a point higher than today's high.

We have the 60-min, daily and weekly patterns all pointing to 2475-ish for a potentially important high for this rally. Based on all this I think it's very important not to chase the market higher. At least let the bulls prove it with a sustained rally above 2477, in which case I'd look for at least 2490-2500.

Volatility index, VIX, Weekly chart

Coming into this week, with the expectation we'd see SPX make it higher, I thought we'd see the VIX drop down to record lows below the June low at 9.37, which matches lows made in December 1993 (9.37) and December 2006 (9.39). But VIX is marginally higher than last week's close at 9.51 but still below 10.

There is simply no fear in this market. If the VIX can make it down to the bottom of its bullish descending wedge (with bullish divergence), we'll see it drop down to 9 before potentially bottoming. Put protection is really cheap right now and a good time to at least add some insurance to protect your long positions. You buy car, life and home/property insurance hoping to never have to need it. The same should be true for your investments.

Dow Industrials, INDU, Daily chart

The Dow is showing a little more upside potential than SPX and could drag SPX above the key level at 2477. It doesn't have to make a new high from here but the first upside target is the trend line along the highs from May 2011 - December 2014, currently near 21720 (using the arithmetic prices scale).

If the Dow makes it up to the top of a rising wedge pattern for its rally from June 29th we could see it reach 21775 by Friday/Monday. The top of a larger rising wedge, for the rally from April, will be near 21830 by next Monday. A sustained rally above 21840 would be a bullish breakout (bears would need to stay in hibernation).

Key Levels for DOW:
- bullish above 21,840
- bearish below 21,279

S&P Midcap 400 index, MID, Daily chart

The chart of MID is looking like a clean setup for a high soon and likely this week, possibly with a quick jab higher Thursday morning. The rising wedge for the rally from March fits very well as the 5th wave of the rally from January 2016 and the bearish divergence since last November helps confirm the bearish interpretation of the pattern. The top of the wedge is near 1783 and if we get a little throw-over above the wedge that's then followed by a collapse back down into the wedge we'd have a good sell signal.

It's possible MID might chop its way a little higher into early August (light-green dashed line) and that's why it's important for the bears to see a break below the July 6th low at 1729 before they'll have confirmation a high is in place. But at the moment it's looking like a good setup for a high (ideally with one more push higher Thursday morning).

Key Levels for MID:
- bullish above 1800
- bearish below 1729

Nasdaq Composite index, COMPQ, Daily chart

The Nasdaq's trend line along the highs from April 2016 - March 2017 stopped rallies in May and again on June 26th. It had made it above the trend line in early June but was unable to hold above the line. Today's rally is another test of the trend line, currently near 6388.

The Nasdaq turns more bullish above 6400, in which case the trend line along the highs from April 2016 - June 2017 could be the upside target. It will be near 6530 by the end of the month. At the moment it's a setup for the completion of the rally from February 2016 but proof will obviously be something more than a corrective pullback.

Key Levels for NDX:
- bullish above 6400
- bearish below 6081

Russell-2000, RUT, Daily chart

The RUT has finally made it up close to its trend line along the highs from 2007-2015, currently near 1442 (today's high was 1441.77). This trend line stopped rallies in December 2016, February, April, June and now here we are again in July. The weekly chart has been showing bearish divergence since the first test in December and as you can see on the daily chart below, there is bearish divergence since April and further weakness compared to the June 9th high.

The price pattern following the March 22nd low is a rising wedge, which accounts for all the 3-wave and corrective price structure within the wedge. The bearish divergence also helps confirm the bearish interpretation of the pattern. The wave count can be considered complete at any time now and therefore my expectation is that the 2007-2015 trend line will once again hold as resistance (game on for a test of that theory).

The final leg of the rising wedge pattern (wave-v) often does a little throw-over above the top of the wedge and we could therefore see the RUT make a stab above the line before collapsing back down. That would be a sell signal if it happens. If the RUT is able to sustain a rally above a price projection at 1450 it would be a confirmed bullish breakout above the rising wedge. Short against that level is the play since it provides a good risk vs. reward play. Just be sure to honor your stop if it rallies above 1450.

Key Levels for RUT:
- bullish above 1450
- bearish below 1398

Russell-2000, RUT, 60-min chart

Supporting the fact that the RUT might have topped out today is the short-term pattern for the leg up from July 6th. It should be a corrective wave count inside a wedge pattern and without getting into the gritty details of the wave pattern, today's rally achieved a price projection for two equal legs up from July 13th to complete the second a-b-c of a double zigzag wave count. Now we wait to see if the bears will recognize a handout when they see one.

I'm not seeing enough evidence in some of the other indexes that I like to cover, such as the Treasury yields and banks, that gives me a strong enough clue about what the next move is likely to be. Yields have been coming back down since the July 7th highs, probably out of concern that the inflation and economic data does not support further rate hikes.

Those same concerns have been hurting the banks, which have been underperforming the S&P since July 6th. The concern about banks is that lower rates will hurt their profitability. But so far the moves in each could be just corrections and it's difficult to say whether or not this month's move will continue or reverse.

Transportation Index, TRAN, Weekly chart

This week the TRAN has been relatively weak compared to the Dow and this follows the possibility that last week's high completed a 5-wave move up from January 2016. There's not enough evidence yet that the TRAN made an important high so it's too early to call. But with a 5-wave move it can be considered complete at any time now.

The TRAN found support today at its 20-dma, as it did back on June 21st, which led to a rally to new highs. That could happen again and as shown on the weekly chart below, there is a price projection at 9823 for the 5th wave of the rally from January 2016. Last Friday's high was near 9764.

U.S. Dollar contract, DX, Daily chart

On Tuesday the US$ dropped below support near 94.80 and unless it's reversed quickly we could see a drop to price-level S/R near 93. I show an expectation for the start of a larger bounce correction into August/September but that requires the dollar to get back above 94.80 sooner rather than later.

The weekly chart shows vulnerability down to about 90, which is where I'm expecting the dollar to head before starting a much stronger rally, but the next couple of days should tell us whether or not the dollar is going to make a bee line down to 90 or instead after a larger bounce correction. At the moment the dollar is more oversold than it's been since its April 2011 low (a major low that led to the 5-year rally into the January 2017 high).

Gold continuous contract, GC, Daily chart

Gold dropped to price-level support near 1205 on July 10th and has made a pretty good bounce off the low at 1204. It has made it back above its 20- and 200-dma's, which nearly crossed on Monday at 1234 and 1233, resp., and now it's looking like it wants to test its 50-dma, near 1248 (Tuesday's high was 1244).

Above 1250 would open the door to its downtrend line from September 2011 - July 2016, which stopped the rally into the June 6th high, as well as its broken uptrend line from December 2016 - May 2017. The lines cross near 1280 in mid-August.

But if gold rolls back over from here and MACD curls back over from the zero line it would create a sell signal.

Oil continuous contract, CL, Daily chart

Oil's bounce off its June 21st low led to a back-test of its broken 50-dma on July 3rd and at the same time it tested the 50% retracement of its May-June decline, both near 47 at the time. A pullback from there has now led to another bounce back up 47 but at least this time the bulls were able to break above the 50-dma, currently near 46.60.

If oil can push higher there is the 62% retracement at 48.20 and then a price projection at 48.92 for two equal legs up from June 21st, which matches up with the 50-week MA at 48.95. Above 50 would open the door to a run up to the downtrend line from May 2015 - January 2017, currently near 52.90. My expectation is for oil to continue lower, either from here or the $49 area.

Economic reports

Thursday morning we'll get the Philly Fed index, unemployment claims and Leading Indicators, none of which is expected to move the market. The market will be left to react to overseas news and opex influence.


Several of the major indexes have reached important levels together and the price patterns for each suggest we could be making an important high at any time. There are some cycle studies pointing to early- to mid-August but the price patterns are at the point where the rally could fail at any time. It's a time for caution about the upside while thinking about downside protection/speculation.

For SPX I see upside potential to the 2500-2520 area but only if it can hold above 2477. It's a good proxy for the broader market so keep an eye on it. I also like the pattern for MID and its rising wedge is another warning sign to not get complacent about the upside. The uber-low VIX is already a warning sign that too many are feeling complacent about the rally.

Opex could finish on a high note, if the rally doesn't fail from here, in which case watch for the possibility of a high next Monday. We have a new moon on Sunday and while I would never place a bet based on the moon's phase, I've seen too many important market highs on/around the new moon to simply dismiss it as astro-voodoo. With a price pattern that's matching up price with time I think we should be alert to the idea that we're topping sooner rather than later.

Proof of course will be price action -- a sharp decline that drops below the July 6th lows would confirm an important top is in place. Stick with the uptrend until it breaks but now's a good time to keep the exit door propped open and try to be the first one out before the crowd hits the narrow doorway.

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

Keene H. Little, CMT

New Option Plays

Volatility Bet

by Jim Brown

Click here to email Jim Brown

Editors Note:

With the Volatility Index at 24-year lows, it is time to bet on a rebound. The volatility has been abnormally low for an extended period of time. This will not last.


VIX - Volatility Index - Index Profile

The CBOE Volatility Index (VIX Index) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility. Several investors expressed interest in trading instruments related to the market's expectation of future volatility, and so VX futures were introduced in 2004, and VIX options were introduced in 2006.

The VIX closed at a 24-year low on July 14th at 9.51. The index has been spending a lot of time under 10 over the last three months and this is highly abnormal. The VIX typically trades up to 20 or more three times a year or more. That has not happen since the days before the election. This period of abnormal volatility WILL eventually end.

With the Trump administration getting more desperate to achieve some legislative goals there is always the risk they will go to extremes to get them accomplished. Add in the unknown but rapidly expanding Russian probes and anything is possible. We saw the Dow fall triple digits intraday on just the release of 5 emails from Trump Jr. If the probe actually uncovered something material, it could cause a major market meltdown.

The debt ceiling and the budget expire on Sept 31st. If Congress cannot get a budget passed and raise the debt ceiling, the government would shut down on October 1st. We have seen this before. The last time it happened the U.S. lost its AAA credit rating and the market declined sharply for more than a week.

What about North Korea? Military force could be used at any time but North Korea seems dead set on testing another nuke and expanding its ICBM tests. If fighting breaks out between the U.S. and North Korea it would cause a significant market decline because of the geopolitical concerns and the potential loss of life in Seoul, South Korea.

Even if none of those events occurred, there is always the risk of a 10% market decline just because we have not had one in a very long time. With August and September the worst months of the year for the market, the potential for a correction this year could be higher than normal. The Nasdaq is already up 18% and the Dow 9% for the year. The FAANG stocks are at record highs, which many say are unsupported by fundamentals.

There are so many potential opportunities for a market disaster. It only makes sense to take out some protection while the volatility is at record lows. I am recommending a November call to get us past the Aug/Sep period and the potential for a debt ceiling event in early October.

Buy Nov $15 call, currently $1.90, no stop loss. Target $22 to exit.


No New Bearish Plays

In Play Updates and Reviews

On Fire!

by Jim Brown

Click here to email Jim Brown

Editors Note:

All the major indexes closed at new highs on Wednesday despite the Dow hiccup on Tuesday. When I say all the indexes, I mean all. The Dow, Nasdaq Composite, Nasdaq 100, S&P-500, S&P-100, S&P-600, S&P-400, Russell 2000, Russell 3000, Russell 1000, Russell Microcap, Vangard Total Market Index and NYSE Composite. The only major indexes not at new highs were sector specific Dow Transports, Biotech Index and Semiconductor Index. There is a bull market revival in progress.

Unfortunately, that meant all the short positions with the exception of McCormick also rose. Advancers were 3:1 over decliners.

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

CPB - Campbell Soup
The long put position was stopped out at $52.15.

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

AAPL - Apple Inc - Company Profile


JP Morgan reiterated a buy on Apple with a $165 price target. The analyst said the iPhone Pro (8) would be announced and ship on time but in low volume. Based on channel checks with suppliers, they did not expect volume shipments until November. He was targeting $1,100 for the price. He said limited production was not unusual for Apple and the limited availability only increased the hype once it was available. He said the Apple Pro would be a "very high end product."

Original Trade Description: June 28th.

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

This play is not going to take a lot of explanation. Shares rallied to $156 in May and then stalled at that level as various rumors continued to circulate over a potential delay in shipping the iPhone 8. Analysts routinely debated the various pros and cons of the Apple outlook. Shares fell to $144 and they have been trading at $145 for the last three weeks. On Tuesday's decline the stop lost $2, which was immediately recovered on Wednesday.

Apple is expected to report earnings on August 1st. The stocks always ramps up into earnings. Since Apple is expected to announce multiple iPhone models in September, a shipment delay on the big iPhone 8 will not be a disaster. We will be out of the position before the August earnings so that will not impact us either way.

The plan is to capture the ramp into the earnings and then exit. Having Apple dormant at $145 for the last three weeks shows there is plenty of support under that level and a rebound could start at any time. Fortunately, because of the dormancy, the options premiums have shrunk.

Apple is a sleeping giant. When it awakes, there could be plenty of price chasing.

Update 7/5/17: Nomura said iPhone 7 demand was weak but it was ok because of the pent up demand for the iPhone 8, expected out in a couple months. The analyst said the model 8 would provide sufficient upside in both volume and price to more than compensate for the current weak sales in the model 7.

Update 7/6/17: Qualcomm is seeking to ban imports of some iPhones in their long running patent dispute with Apple. The news was announced after the bell and shares of Apple declined about 10 cents. This will not impact any current phones or the iPhone 8 because the case will not even begin to be heard until spring of 2018 or later. The two companies will eventually settle out of court. This is just legal sparring.

Update 7/7/17: Canaccord Genuity said it was seeing "steady" iPhone 7 sales ahead of the company's earnings on August 1st. The analyst said the pace of sales is consistent with prior estimates for 42 million in Q2 and 47 million in Q3. They have a $180 price target. A Raymond James analyst said their survey found strong consumer interest in the watch, and Apple speakers including the Beats wireless speakers and the upcoming HomePod smart speaker. The survey found that 14% of iPhone owners plan to buy the HomePod when it goes on sale in December. They also found that 12% of consumers plan to buy the Apple Watch, the highest level since the watch was announced.

Update 7/10/17: An Apple analyst said the iPhone 8 could start at $1,200 and go higher from there. This is definitely going to put a crimp in iPhone 8 sales but Apple should still post higher revenue and profits thanks to the high price. The iPhone 8 is rumored to be available in four colors. There is a continuing rumor that Apple may drop the fingerprint sensor from the model 8 because of space considerations. There are so many features packed into the model 8 that there is no physical room for the sensor in the new screen configuration. Just a rumor but it refuses to go away.

Update 7/11/17: Susquehanna Financial warned that higher prices and stronger competition from Android models, were going to dent Apple's sales. The analyst also said talks with suppliers in Asia confirmed that Apple is trying to put too many things in the iPhone 8 and there is not enough room. The finger print sensor is looking much more likely to be dropped from the top of the line OLED iPhone 8 model. Apple only has a very few weeks to either work out a solution or drop the feature or risk production delays of 2-3 months while engineers go back to the drawing board on the internal hardware configuration.

Deutsche Bank also dumped on Apple's parade saying the expectations for the iPhone 8 are too high. DB warned that the iPhone 8 supercycle was probably only going to be a regular upgrade cycle. DB is expecting sales of 230 million phones in FY 2018. Peak sales were 231 million in FY 2015 and DB is expecting that to be a ceiling because of price, availability and competition. The bank said it was confused about where the new buyers were coming from, especially at a $1,200 price point.

Update 7/12/17: Bank of America and Keybanc both posted notes saying the iPhone 8 production could be delayed. BAC lowered iPhone sales estimates by 11 million units for Q3 and 6 million for Q4 because of the expected delivery delay of 3-4 weeks or longer. They raised the estimates for Q1 by 10 million units. The firm Fast Company said there is a "sense of panic" among iPhone team members as they rush to try and fix software bugs impacting the next release. RBC Capital, Cowen, KGI and Drexel Hamilton believe the announcement could be delayed until October or November.

Update 7/17/17: Morgan Stanley reiterated an overweight rating and raised their price target to $182.

DigiTimes, normally a reliable Apple researcher, said the production on the iPhone 8 could be delayed by up to 2 months because yields at the Foxconn assembly plant are not yet sufficient to begin volume production. Full story

Update 7/18/17: Guggenheim reiterated a buy rating and $180 price target in a note titles, "Quit Worrying" any delay in the iPhone this fall just gets added to subsequent quarter's sales. "Loyal users will wait" for the next model. He said even if unit volume do not grow significantly the higher sales price will lift Apple's revenue 10%. He said the majority of Apple's revenue increases have been from rising prices since the first phone launched at $499 in 2007.

Position 6/29/17:

Long August $150 call @ $3.00, see portfolio graphic for stop loss.

AMAT - Applied Materials - Company Profile


No specific news. Shares posted a decent gain thanks to the bullish Nasdaq. Shares are now closing in on new high resistance at $47.65.

Original Trade Description: July 17th.

Applied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor, display, and related industries worldwide. It operates through three segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. The Semiconductor Systems segment develops, manufactures, and sells a range of manufacturing equipment used to fabricate semiconductor chips or integrated circuits. It offers products and technologies for transistor and interconnect fabrication, including epitaxy, ion implantation, oxidation and nitridation, rapid thermal processing, chemical vapor deposition, physical vapor deposition, chemical mechanical planarization, and electrochemical deposition; patterning, selective removal, and packaging products and systems that enable the transfer of patterns onto device structures; and metrology, inspection, and review systems for front- and back-end-of-line applications. The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, remanufactured earlier generation equipment, and factory automation software for semiconductor, display, and other products. The Display and Adjacent Markets segment offers products for manufacturing liquid crystal displays, organic light-emitting diodes, and other display technologies for TVs, personal computers, tablets, smart phones, and other consumer-oriented devices, as well as equipment for flexible substrates. The company serves manufacturers of semiconductor wafers and chips, liquid crystal and other displays, and other electronic devices. Applied Materials, Inc. was founded in 1967 Company description from FinViz.com

Estimated earnings date August 17th.

AMAT is an old chip company founded in 1967. In chip terms this company is an antique. However, they are growing by focusing on new products rather than fight it out for low margin chip products everyone else is making. One of their focus products is OLED screens. The adoption rates for OLED screens means strong demand for chips to power those screens. By 2021 more than two-thirds of smart phones could have OLED screens. AMAT is shooting for 30% to 40% of the total addressable market two years from now. They currently have 15% share. They have grown their display revenue by 20% annually for the last five years.

The company said the demand for memory, which is currently off the charts, is just getting started. The coming of big data, IoT, streaming video and massive data storage requirements has caused a surge in demand that is just the tip of the coming iceberg. AMAT grew its memory revenue to 35% of the total in the last quarter. Manufacturers are raising prices by about 15% per quarter because of the shortages and there is no end in sight.

The upgraded analyst price targets after the big semiconductor show last week is now $65 on the high side and $55 on the low end. AMAT closed at $46 today.

Position 7/18/17:

Long Aug $47 call @ $1.30, see portfolio graphic for stop loss.

ATHM - Autohome - Company Profile


No specific news but I do not like the way the stock is performing. Shares fell 3% today. I am recommending we close the position.

Original Trade Description: July 12th.

Autohome Inc. operates as an online destination for automobile consumers in the People's Republic of China. The company, through its Websites, autohome.com.cn and che168.com, delivers comprehensive, independent, and interactive content to automobile buyers and owners, including company generated content, include automobile-related articles and reviews, pricing trends in various local markets, and photos and video clips; automobile library, which includes a range of specifications covering performance levels, dimensions, powertrains, vehicle bodies, interiors, safety, entertainment systems, and other unique features, as well as manufacturers' suggested retail prices; new and used automobile listings, and promotional information; and user forums and user generated content. Autohome Inc. also offers advertising services for automakers and dealers; dealer subscription services that allow dealers to market their inventory and services through its Websites; and used automobile listings services, which allow used automobile dealers and individuals to market their automobiles for sale on its Websites. In addition, it operates Autohome Mall, an online transaction platform that facilitates direct vehicle sales and commission-based services; provides iOS- and Android-based applications to allow its users to access its content; and offers technical and consulting services. The company was formerly known as Sequel Limited and changed its name to Autohome Inc. in October 2011. The company was founded in 2008 and is headquartered in Beijing, the People's Republic of China. Company description from FinViz.com.

Expected earnings August 9th.

The company reported revenue of 1.348 billion yuan compared to estimates for 1.3 billion. This was a 23% increase over the year ago quarter. Earnings of 2.8 yuan rose 33% and beat estimates for 2.2 yuan. Free cash flow rose 205.4% to 495.2 million yuan ($71.9 million.) Average daily users rose 23% to 10.1 million on the website and 8.2 million on mobile devices. Average time spent on the application was 18 minutes per day. The company sold 3,658 vehicles from its direct sales inventory in the quarter.

Of particular interest was the launch of the augmented reality showroom during the March auto festival. This was highly received and they increased the options and presentation for the June auto festival.

Shares have risen to $47 where they have held for the last three days. The chart pattern suggests there is an impending breakout over that level.

Position 7/13/17:

Long August $50 call @ $1.75, see portfolio graphic for stop loss.

BABA - Alibaba - Company Profile


No specific news. Shares declined $3 from the intraday high. I hope this was just a hiccup and not a sign of something coming our way.

Original Trade Description: June 10th.

Alibaba Group Holding Limited, through its subsidiaries, operates as an online and mobile commerce company in the People's Republic of China and internationally. It operates Taobao Marketplace, an online shopping destination; Tmall, a third-party platform for brands and retailers; Juhuasuan, a sales and marketing platform for flash sales; Alibaba.com, an online wholesale marketplace; Alitrip, an online travel booking platform; 1688.com, an online wholesale marketplace; and AliExpress, a consumer marketplace. The company also provides pay-for-performance and display marketing services through its Alimama marketing technology platform; Taobao Ad Network and Exchange (TANX), a real-time bidding online marketing exchange in China; and data management platform through TANX for marketers to execute their campaigns with proprietary and tailored data. In addition, it offers cloud computing services, including elastic computing, database, storage and content delivery network, large scale computing, security, and management and application services through its Alibaba Cloud Computing platform; Web hosting and domain name registration services; payment and escrow services; and develops and operates mobile Web browsers. The company provides its solutions primarily for businesses. Company description from FinViz.com

Alibaba is the poor investor's Amazon. With shares at $135, the options are at least reasonable but not cheap. Alibaba is growing as fast or faster than Amazon and tries to copy everything Amazon does.

When the company reported earnings for the last quarter at 63 cents, they missed estimates for 68 cents. Revenue of $5.6 billion easily beat estimates for $5.2 billion. Other than the earnings miss it was a solid quarter with ecommerce up 47% and cloud computing up 102%. Digital media growth was up 234%. Mobile MAUs rose from 493 to 507 million. That is important because 90% of China's ecommerce occurs on a mobile device.

The company announced plans to buy back $6 billion in stock over a two-year period.

Earnings August 18th.

Shares dipped on the earnings miss then spiked on the guidance to $125.50, which was a new high. After a little more than two weeks of post earnings consolidation, shares returned to that $125.50 level and closed at a new high.

There was an analyst day last week and that kicked the stock up to another level with a $10 gain. The company guided for 45% to 49% revenue growth in this year and analysts were only expecting 37%. MKM partners raised the price target to $177. Pacific Crest raised their price target to $160 from $137. Needham raised their target to $155. The Benchmark Company is targeting $175.

Shares declined on Tuesday on no news. With the stock overbought after the analyst meeting we could be seeing some simple profit taking. I am going to put an entry trigger on the position. If shares continue lower I will revise the entry.

Update 6/20/17: Alibaba is hosting a forum for 3,000 entrepreneurs in Detroit to explain how easy it is for them to begin selling products on Alibaba's websites. CEO Jack Ma said in another interview he expects to employ 1 million workers in the USA.

Update 6/27/17: JP Morgan initiated coverage with an overweight rating and $190 price target. Barclays said it valued Alibaba in a sum of the parts method at $200 but their price target for the parent is $175 with an overweight rating.

Update 6/29/17: Mott Capital said Alibaba could be worth $210 on a fundamental basis. A "source" in China said Alibaba will launch a device similar to Amazon's Echo but Chinese speaking, next week. That should give the stock a decent pop.

Update 7/5/17: Alibaba announced the Alexa clone called Genie X1, which will be available to the first 1,000 people for a one-month trial. The cost will be $73 during this live test and it only speaks mandarin.

Update 7/10/17: RBC analyst Mark Mahaney raised his price target on BABA from $140 to $160 and reiterated an outperform rating saying fundamental trends remain impressive. Alibaba said recently it is targeting $1 trillion in gross merchandise volume in 2020. Alibaba's Singles Day promotion is 40 times larger in sales than Amazon's Prime Day, which starts tonight.

Position 6/19/17 with a BABA trade at $139.50

Long Aug $145 call @ $5.95, see portfolio graphic for stop loss.
Short Aug $155 call @ $2.92, see portfolio graphic for stop loss.
Net debit $3.03.

PYPL - PayPal - Company Profile


Shares fell -$1.50 at the open on a valuation downgrade by Suntrust. The analyst said the company was trading at a premium valuation and reduced his rating from buy to hold. Shares battled back to close only fractionally lower.

Original Trade Description: June 21st.

PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. Company description from FinViz.com.

PayPal started out as a payment system for Ebay. Since then they have moved into dozens of areas including credit cards, peer to peer payments. Instead of being locked into one business model, they are rapidly expanding to multiple business models. Recently they partnered with MasterCard and Visa to have their digital payments processed on their systems. The company is expanding the scope of its Venmo payment platform, which handled $6.8 billion in Q1, up 114%. This peer to peer app will now allow you to pay for goods at any merchant that accepts the app, just like Apple pay.

In Q1 PayPal revenue rose 17% to $2.975 million and earnings rose 5%. Total accounts rose 23% to 203 million. As a comparison, Mastercard's revenue was less at $2.7 billion. That is a shocker to most people.

With their Q1 earnings, PayPal committed to buy back $5 billion in stock.

Expected earnings July 26th.

Shares dipped with the Nasdaq tech crash but are recovering. Their recent high was $55 and shares closed at $53.50 today. Options are inexpensive.

Update 7/5/17: Payment processor, Vantiv, offered $10 billion to buy London based Worldpay. That immediately boosted Paypal and Square on thoughts there may be other combinations in the future. Paypal has a market cap of $66 billion and Square $5 billion so Paypal is not likely a potential target but they could benefit from acquiring a smaller player.

Update 7/12/17: PayPal announced a partnership with Apple to use PayPal in the iTunes App Store. This will let users with Paypal accounts buy songs, movies, etc from iTunes. This is a good deal for both companies.

Update 7/13/17: Analyst at Monness, Crespi, Hardt published a note saying PayPal was his "top pick" for 2017. Shares rallied $1.35 to a new high.

Position 6/22/17:

Long August $55 call @ $1.58, see portfolio graphic for stop loss.

THO - Thor Industries - Company Profile


No specific news. THO is reactive to the Dow's movement. The company posted only a minor gain to match the Dow's minor gain.

Original Trade Description: July 15th.

Thor Industries, Inc., through its subsidiaries, designs, manufactures, and sells recreational vehicles, and related parts and accessories primarily in the United States and Canada. It operates through Towable Recreational Vehicles and Motorized Recreational Vehicles segments. The company offers travel trailers under the Airstream International, Classic Limited, Sport, Flying Cloud, Land Yacht, and Eddie Bauer trade names, as well as Interstate and Autobahn Class B motorhomes; gasoline and diesel Class A and Class C motorhomes under the Four Winds, Hurricane, Chateau, Challenger, Tuscany, Axis, Vegas, Palazzo, Synergy, Quantum, Compass, Gemini, A.C.E, Alante, Precept, Greyhawk, and Redhawk trade names; and fifth wheels under the Redwood and DRV Mobile Suites trade names. It also provides conventional travel trailers and fifth wheels under the Montana, Springdale, Hideout, Sprinter, Outback, Laredo, Alpine, Bullet, Fuzion, Raptor, Passport, Cougar, Coleman, Kodiak, Aspen Trail, Voltage, Cameo, Cruiser, ReZerve, Sunset Trail, Zinger, Landmark, Bighorn, Sundance, Elkridge, Trail Runner, North Trail, Cyclone, Torque, Prowler, Wilderness, Shadow Cruiser, Fun Finder, Stryker, Sportsmen, Spree, Venom, Durango, SportTrek, Connect, Sportster, Sonic, Jay Flight, Jay Feather, Eagle, Pinnacle, Seismic, AR-One, Launch, Autumn Ridge, Travel Star, Highlander, Roamer, and Open Range trade names. In addition, the company offers equestrian recreational vehicle products with living quarters under the Premiere, Silverado, Ranger, Laredo, Trail Boss, and Trail Hand trade names; lightweight travel trailers and specialty products under the Camplite and Quicksilver trade names; and Class A motorhomes under the Insignia, Aspire, Anthem, and Cornerstone trade names, as well as provides aluminum extrusions and specialized component products. Company description from FinViz.com

In a weak economy, Thor is kicking butt. The company reported earnings of $2.11 which rose 41.6% compared to estimates for $1.87. Revenue of $2.02 billion rose 57% beat estimates for $1.96 billion. Operating cash flow rose 26.2% and gross profits rose 45.5%.

Sales of towable travel trailers rose 52.6% and sales of motorized RVs rose 78.7%. There was no bad news in the Thor report.

Estimated earnings date September 4th.

With the company posting record earnings the stock spiked from $94 to $104 on June 6th. When the market dipped, shares only pulled back to $102. In late June they rebounded to $110. During the market volatility over the last three weeks they dipped back to $102 and found support there once again. Now that the market has turned positive shares are rebounding.

I am using the September strike because of the September earnings date. We will exit well before then but that date will keep the premiums inflated.

Position 7/17/17:

Long Sept $110 call @ $3.00, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

BBBY - Bed Bath & Beyond - Company Profile


No specific news. Shares rebounded with the market as shorts moved elsewhere in a bullish market.

Original Trade Description: July 10th.

Bed Bath & Beyond Inc., together with its subsidiaries, operates a chain of retail stores. It sells a range of domestics merchandise, including bed linens and related items, bath items, and kitchen textiles; and home furnishings, such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables, and juvenile products. It also provides various textile products, amenities, and other goods to institutional customers in the hospitality, cruise line, healthcare, and other industries. As of February 25, 2017, the company had a total of 1,546 stores, includes 1,023 Bed Bath & Beyond stores in 50 states, the District of Columbia, Puerto Rico, and Canada; 276 stores under the names of World Market, Cost Plus World Market, or Cost Plus; 113 buybuy BABY stores in 35 states and Canada; 80 stores under the CTS name; and 54 stores under the Harmon name. It also offers products through various Websites and applications, such as bedbathandbeyond.com, bedbathandbeyond.ca, harmondiscount.com, christmastreeshops.com, buybuybaby.com, buybuybaby.ca, harborlinen.com, t-ygroup.com, and worldmarket.com. In addition, the Company operates Of a Kind, an e-commerce Website that features specially commissioned limited edition items from emerging fashion and home designers; One Kings Lane, an online authority in home decor and design that offers a collection of selected home goods, and designer and vintage items; PersonalizationMall.com, an online retailer of personalized products; Chef Central, an online retailer of kitchenware, cookware, and homeware items catering to cooking and baking enthusiasts; and Decorist, an online interior design platform that provides personalized home design services. Company description from FinViz.com.

Expected earnings September 21st.

In late June, the company reported earnings of 53 cents that missed estimates for 66 cents. Revenue of $2.74 billion missed estimates for $2.79 billion. Same store sales declined -2%. It was not a pretty report.

The management said they plan to increase the pace of store closings and cost cuts but so far that has not been working. They have been increasing their emphasis on online sales but to compete with Amazon they have to offer free shipping and that lowers their margins. Store traffic is slowing because more people are shopping online. Those that shop online have many websites to choose from and BBBY gets lost in the shuffle. One analyst called this an existential crisis for the company.

Position 7/13/17:

Long Nov $27.50 put @ $1.72, see portfolio graphic for stop loss.

CPB - Campbell Soup - Company Profile


Campbell reaffirmed its guidance for the year which ends July 30th for earnings of $3.05-$3.09 and analysts were expecting $3.05. Revenue was expected to be flat to down 1% which met estimates. Shares spiked $1.50 to stop us out for a minor 38 cent loss.

Original Trade Description: July 8th.

Campbell Soup Company, together with its subsidiaries, manufactures and markets food and beverage products. It operates through three segments: Americas Simple Meals and Beverages; Global Biscuits and Snacks; and Campbell Fresh. The Americas Simple Meals and Beverages segment engages in the retail and food service of Campbell's condensed and ready-to-serve soups; Swanson broth and stocks; Prego pasta sauces; Pace Mexican sauces; Campbell's gravies, pastas, beans, and dinner sauces; Swanson canned poultry; Plum food and snacks; V8 juices and beverages; and Campbell's tomato juices. The Global Biscuits and Snacks segment provides Pepperidge Farm cookies, crackers, bakery, and frozen products in the United States retail; and Arnott's biscuits in Australia and the Asia Pacific; and Kelsen cookies worldwide, as well as meals and shelf-stable beverages in Australia and the Asia Pacific. The Campbell Fresh segment provides Bolthouse Farms fresh carrots, carrot ingredients, refrigerated beverages, and refrigerated salad dressings; and Garden Fresh Gourmet salsa, hummus, dips, and tortilla chips, as well as refrigerated soups. The company sells its products through retail food chains, mass discounters, mass merchandisers, club stores, convenience stores, drug stores, and dollar stores, as well as other retail, commercial, and non-commercial establishments; and independent contractor distributors. Campbell Soup Company was founded in 1869. Company description from FinViz.com.

Campbell added a fresh foods division but the business is failing. Sales fell -8% in Q2 to $260 million. The company warned that sales would decline for the rest of 2017. The CEO said, "Let's be real, I am not satisfied with our overall sales performance in the quarter. Our performance over the last year in fresh food has been disappointing." Total sales declined to $2.17 billion and missed estimates for $2.22 billion. The company has spent almost $2 billion since 2012 to build the Fresh Division and it is still declining.

The company announced on Friday it was buying Pacific Foods of Oregon, an organic foods distributor, for $700 million. Pacific only produced revenue of $218 million in 2016. This is actually a good move for Campbell but they paid too much for Pacific. Their earlier acquisition for the Fresh Division was Bolthouse, a producer of carrots, juices and salad dressings, for $1.55 billion.

Campbell's is struggling because consumers are buying less packaged foods and more fresh and organic foods. They are buying less packaged food because they are moving to healthier choices. The CEO's admission that sales would decline for the rest of 2017, will likely be followed by another one that sales will decline in 2018. It is a tough retail market and Amazon's acquisition of Whole Foods is going to make it even harder.

Earnings August 18th.

Shares have fallen below support at $52.50 and could continue significantly lower.

Position 7/10/17:

Closed 7/19/17: Long Aug $50 put @ 80 cents, exit .42 cents, -.38 loss.

MKC - McCormick & Company - Company Profile


We got the catalyst. MKC said it was buying the North American business from Reckitt Benckiser Group for $4.2 billion. Reckitt brands include French's Mustard, Frank's RedHot Sauce, among others. Shares imploded with a $5 drop because the acquisition price was 7 times sales and 20 times EBITDA. Normally major deals in the sector trade for 3 times sales and 16 times EBITDA. Analysts had previously expected the unit to sell for $3 billion. As the bidding closed, MKC was competing with Unilever and Hormel for the win. Moody's said it was reviewing MKC for a possible 3 notch downgrade because of the amount of debt required and the sharp increase in leverage.

Original Trade Description: July 10th.

McCormick & Company, Incorporated manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. The company operates through two segments, Consumer and Industrial. The Consumer segment offers spices, herbs, and seasonings, as well as desserts. This segment markets its products under the McCormick, Lawry's, Club House, Gourmet Garden, OLD BAY brands in the Americas; Ducros, Schwartz, Kamis, and Drogheria & Alimentari, and Vahine brand names in Europe, the Middle East, and Africa; McCormick and DaQiao brands in China; and McCormick, Aeroplane, and Gourmet Garden brand names in Australia, as well as markets regional and ethnic brands, such as Zatarain's, Stubb's, Thai Kitchen, and Simply Asia. It also supplies its products under the private labels. This segment serves retailers comprising grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce retailers directly and indirectly through distributors or wholesalers. The Industrial segment offers seasoning blends, spices and herbs, condiments, coating systems, and compound flavors to multinational food manufacturers and foodservice customers. It serves foodservice customers directly and indirectly through distributors. McCormick & Company, Incorporated was founded in 1889 and is based in Sparks, Maryland. Company description from FinViz.com.

McCormick reported earnings of 82 cents that beat estimates for 76 cents. Revenue of $1.11 billion rose 4.8% mostly due to acquisitions in 2016. Analysts were expecting $1.1 billion. They reaffirmed their full year guidance for earnings of $3.94 to $4.02 but they did lower estimates for some of the other projections.

Expected earnings September 28th.

Analysts asked them repeatedly on the conference call why they did not lower earnings guidance when everything else was declining. The CEO said it was "too early" to make that call and they would review it at the end of this quarter. For analysts that was an admission that guidance would probably be lowered at a later date. Shares declined sharply.

Shares rebounded almost immediately but are now poised to move lower after closing at a 4-month low on Monday.

Position 7/11/17:

Long Sept $90 put @ $1.05, see portfolio graphic for stop loss.

NKE - Nike Inc - Company Profile


No specific news. Only a minor rebound in a bullish market. Needham initiated coverage with a hold rating and that provided support.

Original Trade Description: July 5th.

NIKE, Inc., together with its subsidiaries, designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. It offers products in nine categories, including running, NIKE basketball, the Jordan brand, football, men's training, women's training, action sports, sportswear, and golf. The company also markets products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking, and outdoor activities. In addition, it sells sports apparel; and markets apparel with licensed college and professional team and league logos. Further, the company sells a line of performance equipment, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs, and other equipment under the NIKE brand name for sports activities; various plastic products to other manufacturers; athletic and casual footwear, apparel, and accessories under the Jumpman trademark; action sports and youth lifestyle apparel and accessories under the Hurley trademark; and casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks. Additionally, it licenses agreements that permit unaffiliated parties to manufacture and sell apparel, digital devices, and applications and other equipment for sports activities under NIKE-owned trademarks. The company sells its products to footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts through NIKE-owned retail stores and Internet Websites (direct to consumer operations), as well as independent distributors and licensees. Company description from FinViz.com.

Nike reported earnings last week of 60 cents that beat estimates for 50 cents. Revenue of $8.7 billion narrowly beat estimates for $8.6 billion. The earnings spike was due mostly to a lower tax rate.

The stock spiked $5 on short covering after they announced they were turning to Amazon to help them sell shoes and apparel. Some analysts believe this will lead to further discounting because Amazon is a cutthroat market. We have already seen a weak market for high dollar Nike models with sales at 50% off. Moving to Amazon will cause additional discounting in those high dollar models. They also believe it will lead to lower orders from distributors and cause them even more grief in the U.S. where sales were flat. The U.S. is Nike's biggest market where they face less competition from brands like Adidas, which is rapidly accelerating.

Futures orders were reportedly down -10% indicating weak orders from distributors. As Nike shifts more from wholesale sales to the direct to retail market, they are going to face an entirely different set of problems. They announced they were laying off 1,400 employees as part of their consumer direct offense strategy.

Expected earnings Sept 28th.

The earnings are over and the post earnings depression phase should be starting. With everyone else starting their earnings next week, traders will be leaving Nike to find a stock with positive momentum.

Position 7/6/17:

Long Aug $57.50 put @ $1.51, see portfolio graphic for stop loss.

ROST - Ross Stores - Company Profile


No specific news. Only a minor rebound in a bullish market.

Original Trade Description: July 11th.

Ross Stores, Inc., together with its subsidiaries, operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dd's DISCOUNTS brand names in the United States. It primarily offers apparel, accessories, footwear, and home fashions. The company's Ross Dress for Less stores sell its products at savings of 20% to 60% off department and specialty store regular prices primarily to middle income households; and dd's DISCOUNTS stores sell its products at savings of 20% to 70% off moderate department and discount store regular prices to customers from households with moderate income. As of March 6, 2017, it operated 1,363 Ross Dress for Less stores in 37 states, the District of Columbia, and Guam; and 198 dd's DISCOUNTS stores in 15 states. Company description from FinViz.com.

Expected earnings August 17th.

They reported Q1 earnings of 82 cents compared to estimates for 79 cents. Revenue of $3.31 billion beat estimates for $4.27 billion. Same store sales rose 3%. Operating margins shrank. The company is planning on operating 90 stores in 2017.

Unfortunately, they guided for the full year for earnings of $3.07 to $3.17 and analysts were expecting $3.15 at the midpoint. The guidance from Ross also includes an extra week in 2017 over 2016 and that means it is even weaker than it seems.

They guided for same store sales of 1-2% and well below the 3% in Q1. They also guided for margins to contract again from 15.2% in Q1 to 13.9%-14.1%. A week later regulators posted criminal charges against a California man that generated $8.2 million in profits on insider trading in Ross shares. The insider was not named. Shares rolled over and are still falling. Three analysts have cut their estimates for Ross since the earnings.

With the retail sector getting hit every day by some store closure notice or analyst downgrade, Ross could continue falling until their earnings report.

Update 7/14/17: Telsey Advisory Group upgraded Ross from market perform to outperform with a $70 price target. Shares spiked $1.60 at the open to stop us out but then gave back all but 34 cents. I am recommending we reload this position using the same option/strike.

Update 7/17/17: The company said they opened 28 new stores in June/July as part of their plans to open 90 stores in 2017. The company currently has 1,384 locations and are planning on 2,500 in the years ahead. That is a lot of additional overhead in a declining retail market.

Position 7/17/17:

Long August $52.50 put @ $.80, see portfolio graphic for stop loss.

Previously closed 7/14: Long August $52.50 put @ $1.04, exit .65, -.39 loss.

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