Option Investor

Daily Newsletter, Wednesday, 8/23/2017

Table of Contents

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

Market Wrap

Some Whipsaws Followed By Today's Doji Day

by Keene Little

Click here to email Keene Little
The stock market has been whipping up and down since the August 8th highs and traders are probably getting tired. Tuesday's big rally on low volume (short covering) was followed by today's gap down and sideways trading that created a doji day. Traders are wondering which way to lean.

Today's Market Stats

The price results seen in the table above look decidedly bearish and that resulted from this morning's gap down. There was no follow through to the downside and the bounce off the initial low actually produced slightly bullish market internals. But it was just another low-volume day with no conviction by either side as each waits for the other to blink after the whipsaw gyrations this month.

Other than the noise from the White House and the even more distracting noise from the mainstream press, there was little to help guide investors today. Many are waiting to see what comes out of the Jackson Hole meeting of global bankers that starts tomorrow and today's trading volume was the lightest of the year when you exclude half-day sessions. There's probably not a lot that can be gleaned from today's price action.

This morning's gap down was the result of steady selling in the futures overnight, which was blamed on Trump's statement that he'll let the government shut down if Congress doesn't fund The Wall on the Mexican border. First of all, he's a negotiator and he'll start off asking for the moon and then figure out what has to be compromised. Why anyone reacts to his bluffing statements is beyond me. Second, if the government shuts down it would probably help the deficit so go ahead, make my day. Only kidding of course (?) but it does seem to me the press can make a mountain out of a molehill.

There's actually very little to report on since the geopolitical news was quiet and bankers are on their way to Jackson Hole so they weren't out there today trying to confuse the market. The market was left on its own and it didn't know what to do. I'll simply dive into the charts for some clues.

S&P 500, SPX, Weekly chart

The SPX weekly chart shows the bearish divergence at the August high vs. the March high and is now threatening to break down. It's struggling to hold onto the uptrend line from February-November 2016, currently near 2426, which was tested with last Friday's and this past Monday's lows. It's an important trend line for the bulls to continue defending.

The next important support line below the February-November 2016 uptrend line is 2400-2405. A drop below price-level support near 2400 would be stronger confirmation that an important high is already in place. But there's still bullish potential to the intersection of some important trend lines -- a trend line along the highs from November 2015 - March 2017, the midline of the up-channel from 2010-2011 and a trend line along the highs since April 2016 (excluding the March 1st high), all of which intersect near 2525 at the end of this month.

S&P 500, SPX, Daily chart

Tuesday's rally for SPX had it closing just above its broken 50-dma near 2450 but it then gapped back down below 2450, leaving a head-fake break. The bounce off this morning's gap down had it almost back up to the 50-dma but stopped about a point below it. The bulls want the 50-dma recaptured and then see a break of the downtrend line from August 8th, currently near 2460. The bears want to see a continuation lower (bearish kiss goodbye following the back-test) and a drop below Monday's low at 2417 in order to confirm a stronger selloff will likely follow.

Key Levels for SPX:
- bullish above 2475
- bearish below 2420

S&P 500, SPX, 30-min chart

Today's small sideways consolidation looks like a bearish continuation pattern following this morning's gap down. It might be good for just another leg down to about 2434, for two equal legs down from Tuesday's high, and then start another rally leg. The more bearish pattern is a series of 1st and 2nd waves to the downside, which would mean a much stronger decline to follow, one that would likely drop SPX to its 200-dma, maybe near 2360, before getting much of a bounce.

Dow Industrials, INDU, Daily chart

On August 17th the Dow broke its uptrend line from November-May and yesterday's rally was back up to the line and its broken 20-dma. It looks like a back-test followed by a bearish kiss goodbye (albeit with only a small decline so far). Back below its trend line along the highs from May 2011 - March 2015, where it closed today at 21812, would be more bearish while a rally above its 20-dma at 21921 would be more bullish.

Key Levels for DOW:
- bullish above 22,086
- bearish below 21,535

Nasdaq Composite index, COMPQ, Daily chart

Similar to the SPX and Dow patterns, the Nasdaq bounced up to resistance with Tuesday's rally, which is its uptrend line from November-July. It had closed slightly above the trend line but this morning's gap down left a head-fake break and possible bull trap. The bounce off this morning's low almost made it back up to the line, now near Tuesday's high at 6302, but is currently looking like a back-test that's ready for its bearish kiss goodbye.

Key Levels for COMPQ:
- bullish above 6424
- bearish below 6177

Russell-2000, RUT, Daily chart

The RUT was relatively strong today since it made it back into green following this morning's gap down. The bounce off its August 18th low also looks impulsive, which suggests just a little deeper pullback and then another leg up for a larger bounce correction to its July-August decline. For now I'm depicting a larger bounce up to the 38% retracement of its decline, near 1389. But it's possible we'll only see a bounce up to its broken uptrend line from March-May, currently near 1382, which would coincide with a back-test of its broken 200-dma.

Key Levels for RUT:
- bullish above 1413
- bearish below 1347

10-year Yield, TNX, Daily chart

Since the July 6th high for TNX I've been waiting to see what is going to develop. I've been thinking yields will head lower but the fact that it's building another descending wedge (similar to the May-June pullback) it has me wondering if we're going to first get another leg up like the June-July rally.

The difference with the current descending wedge is that it is not showing bullish divergence like that seen for the May-June wedge. I think we'll see a breakdown from the wedge, in which case the decline would likely accelerate following the breakdown from a bullish pattern (failed patterns tend to fail hard).

Below 2.14 would be a bearish heads up and below 2.10 would confirm a breakdown in progress. If we do see a breakdown, there will be time to evaluate the decline and figure out a downside objective. There will be potential support near 2.00, which is a downside objective following the double top between December 2016 and March 2017. That projection crosses the bottom of a larger descending wedge (almost a parallel down-channel) for the decline from December 2016 on September 1st.

High Yield Corporate Bond fund, HYG, Daily chart

A week ago I had shown the HYG chart, updated below, to point out how it had broken down from its shallow rising wedge pattern and bounced back up to the bottom of it. It then dropped back down on August 24th to its 200-dma, bounced and is now back up near the bottom of the rising wedge again, currently near 88.12. Two equal legs up for the bounce off the August 10th low also points to 88.12. The broken 50-dma is also now approaching 88.12 and it's likely HYG won't be able to do better than that. I expect to see HYG continue lower, which would show a reluctance to hold riskier bonds. That in turn would be a bearish warning to stock holders.

Baa Corporate bond yields vs. 10-year yield, chart courtesy St. Louis Federal Reserve

Following up the chart above, the chart below shows the spread between TNX and Baa Corporate bond yields, which has dropped below where it was in early 2014 (a high for HYG but not the stock market, which made it higher into a large rolling top pattern into mid-2015). The spread was even lower (near 1.6) in 2006-2007 before skyrocketing in 2008 when the financial world was falling apart.

So this is a good measure of sentiment in that chasing slightly higher yields in junk bonds is a sign of confidence in the economy and markets. When fear enters the arena those same junk bonds sell off hard and drives yields higher. At the same time Treasuries are bought (safe haven) and drives their yields lower. While this spread can always go lower and can stay low for a long time, it can provide a good warning sign when it starts back up.

Transportation Index, TRAN, Daily chart

The TRAN has been a leading indicator as far as showing us potential weakness in the broader stock market, peaking about a month before the Dow. Today it dropped below last Friday's low, something the Dow has not done yet (it will need to drop below 21641 in order to accomplish the same or about 170 points below today's close).

The TRAN looks bearish following the multiple back-tests and failures since first bouncing off its 200-dma on August 2nd. It back-tested price-level S/R near 9310 on August 8th (the Dow's high) and then a higher bounce into the August 16th high was a back-test of its broken 50-dma. It then dropped back down and broke its uptrend line from June 2016 - May 2017 as well as its 200-dma on August 17th. Yesterday's rally was good for a back-test of its broken 200-dma and its declining 20-dma and today's selloff leaves another bearish kiss goodbye.

This is all bearish price action and there's very little reason to want to buy the pullback. The next potential support level is the May 18th low at 8818 and the uptrend line from January-June 2016, near 8725 by the end of the month.

DJ US Home Construction index, DJUSHB, Daily chart

In addition to the transports, the home builders are good to watch to see if they support the idea of a growing or shrinking economy. Both are looking weak and that portends weak things for the economy and the stock market. The home builders had been working their way higher in a rising wedge since the March 16th high and showing bearish divergence along the way. The final part of the rally, following the July 10th high, was a choppy move with further bearish divergence.

The choppy ending pattern warned us of a top and now price has dropped below the bottom of the rising wedge as well as its 50-dma. This morning's report of weak new-home sales helped trigger more selling in the home builders. The risk now is that the rising wedge is likely to get retraced quickly if indeed the index has topped, which would mean a fast trip back down to the April low near 630. That would also be good for a test of its 200-dma.

U.S. Dollar contract, DX, Daily chart

Following the August 2nd low for the US$ I thought we'd see a multi-week consolidation over to the top of its steeper down-channel for price action since May. A wider down-channel from January was broken in mid-July and I thought we'd likely see the bottom of it act as resistance if back-tested, which it was last week. The dollar is now pinched between price-level support near 93 and the bottom of the wider down-channel and top of the steeper down-channel, which are currently near 93.65. It's possible we'll see a larger consolidation before heading lower but the risk is for another leg down sooner rather than later. The next downside target is near 90.

Gold continuous contract, GC, Daily chart

Gold is struggling at price-level resistance near 1298 (two previous highs in April and June) but consolidating near this level has it looking like we'll see a bullish breakout. It has already broken its downtrend line from September 2011 - July 2016 and it climbed back above its uptrend line from December 2016 - May 2017, both of which are bullish.

Assuming gold can break price-level resistance at 1308 (its January 2015 and November 2016 highs) we should see a nice rally. The upside target will be 1377 where the rally from December 2016 would achieve two equal legs up. That would also be good for a test of its July 2016 high at 1377.

Silver continuous contract, SI, Daily chart

Gold bulls would like to see support from silver and right now they don't have it. Silver has been struggling to get back above its broken uptrend line from December 2015 - December 2016, currently near 17.20. Silver is also currently struggling to get back above its broken 200-dma, which has been acting as resistance since first tested on August 10th. If silver bulls can break through 17.20 they'll then have to deal with the downtrend line from July 2016 - April 2017, near 17.55.

Oil continuous contract, CL, Daily chart

Since the low in June oil has been attempting a bounce and essentially ping-ponging between support and resistance at its moving averages and broken uptrend line (April-August-November 2016 was resistance to the high on August 1st. The pullback from the August 1st high found support at the 50-dma but the bounce stopped at the 20-dma. I think oil is heading lower but I can easily see another bounce higher to test its downtrend line from May 2015 - January 2017. Even the oscillators are currently neutral so there's no good trade setup here.

Economic reports

Thursday morning is another light one for economic reports, which will include the usual unemployment data, existing home sales (no change expected) and natural gas inventories. Nothing market moving there.


Today's doji day was on the lowest volume day of the year (excluding half-day sessions) and this followed a low-volume day for Tuesday's big rally. Short covering on Tuesday led to a gap down and not much else today. Investors are waiting for something and playing it cautious after this month's whipsaws. Maybe something out the Jackson Hole meeting will trigger a bigger move one way or the other.

The 3-wave pullback from August 8th could easily be viewed as just an a-b-c pullback correction that will now lead to another rally to new all-time highs (except the RUT). That means today's little pullback should see a reversal, either from here or after a little lower to create a small a-b-c pullback from Tuesday. In any case, the bulls will be weakened further if they don't get another rally going by Thursday afternoon and certainly on Friday.

The bears will be in good shape if Tuesday's rally is reversed since the more bearish wave count would then be in play, which calls for a much stronger decline in the coming week(s). We should know which direction will be the right one by Friday at the latest. Trade carefully since we're probably looking for a big move in the coming days.

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

Keene H. Little, CMT

New Option Plays

No Changes

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market decline returned after the one-day short squeeze. There was no race to the bottom but there was a definite return to a bearish bias. The S&P futures are down -4.50 and declining in the evening session. With the president at war with congressional leaders and threatening a government shutdown in September, the most likely direction for Thursday is down. I would be thrilled if the rally continued but the calendar is working against us. We have a full portfolio with both bullish and bearish positions. There is no reason to add additional risk without a good idea about market direction.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Inside Day

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes posted an inside day suggesting investor indecision. An inside day is when the entire day's range is inside the range for the prior day. Today, it was a negative inside day and suggests a negative bias. Basically, there was less conviction than on Tuesday and the traders expressing a preference were selling.

The Trump threat to shutdown the government if there was no funding for a wall, kicked off the political brinksmanship that we are likely to see over the next six weeks. This will be market negative.

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

No Changes

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


No specific news. Shares were barely positive in a weak market. They were experiencing a little drag after Samsung formerly announced the Note 8 with a 6.3 inch screen, the biggest format phone available from anybody.

Original Trade Description: Aug 12th.

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. Company description from FinViz.com.

Earnings Oct 31st.

We exited a position on Apple just prior to earnings. The report was strong and shares spiked $9 at the open the following day. After 9 days of trading they have been higher and lower but they refuse to give up their gains. Shares were up $2 on Friday when the rest of the big cap market was flat.

The reason Apple may have less risk than the rest of the market is the expected production announcement in September. They are expected to announce 2 new iPhone 7s and the iPhone 8/Pro plus some other upgrades. This is going to be a major product announcement that could propel Apple to $200 over the next six months. We know Apple shares normally ramp into an announcement and then decline shortly thereafter on a sell the news event. We will decide a couple days ahead of the announcement if we want to hold over.

I am using the November strikes because that is after earnings and the options should hold their value more in case of market volatility than an option that expires before earnings. Just because we buy more time does not mean we have to use it. I am recommending a spread because of high option premiums.

Update 8/14/17: BlueFin Research, as reported in Barrons, claims the production ramp for iPhones in Q3 is at record levels with 53 million phones expected. They will be split between the 7s, 7s Plus and the iPhone 8/Pro with the iPhone 8 only 5-6 million of that total. That will change in Q4 to 44 million of the model 8 with 30 million a quarter for the rest of 2018. They did not disclose sources but it is believed they are basing their estimates on the component quantities being shipped to manufacturers.

Aetna (AET) and Apple held talks last week with Aetna wanting to offer the Apple Watch either free or discounted to all 23 million of its members. They currently offer the watch to their 50,000 employees as part of a fitness program.

Another news story said that Google is paying Apple a license fee of up to $3 billion for 2017 to remain the default search engine on Apple devices. That would equate to 5% of Apple's total annual profit and 25% of their earnings growth. That is the largest contributor to the growth in service revenues. Bernstein said Google pays a fee to Apple of 34% of whatever it earns from ads delivered to Apple users. That is huge!

Position 8/14:

Long Nov $160 call @ $8.05, see portfolio graphic for stop loss.
Short Nov $175 call @ $2.72, see portfolio graphic for stop loss.
Net debit $5.33.

ALB - Albermarle - Company Profile


No specific news. Only a minor retracement in a weak market.

Original Trade Description: Aug 21st.

Albemarle Corporation develops, manufactures, and markets engineered specialty chemicals worldwide. The company offers lithium compounds, including lithium carbonate, lithium hydroxide, lithium chloride, and lithium specialties and reagents for applications in lithium batteries, high performance greases, thermoplastic elastomers for car tires, rubber soles and plastic bottles, catalysts for chemical reactions, organic synthesis processes, life science, pharmaceutical, and other markets; cesium products for the chemical and pharmaceutical industries; and zirconium, barium, and titanium products for pyrotechnical applications. It also manufactures cesium products for the chemical and pharmaceutical industries; and zirconium, barium, and titanium products for various pyrotechnical applications, including airbag igniters; and performance catalyst solutions, such as polymer catalysts, curatives, organometallics, and electronic materials for polyolefin polymers, packaging, non-packaging, films, injection molding, alpha-olefins, electronic materials, solar cells, polyurethanes, epoxies, and other engineered resins markets. In addition, the company offers bromine and bromine-based solutions for fire safety, chemical synthesis, mercury control, water purification, beef and poultry processing, and various other industrial applications, as well as for the oil and gas well drilling, and completion fluids applications. Further, Albemarle Corporation provides clean fuels technologies, which is primarily composed of hydroprocessing catalysts; and heavy oil upgrading, which is primarily composed of fluidized catalytic cracking catalysts and additives for application in the refining industry. It serves petroleum refining, consumer electronics, energy storage, construction, automotive, lubricants, pharmaceuticals, crop protection, food safety, and custom chemistry services markets. Company description from FinViz.com.

With production of electric cars exploding with more than 1 million expected to be manufactured in 2018, the demand for Lithium-ion (Li-ion) rechargeable batteries is also exploding. When Tesla's Gigafactory reaches full production in 2020 of 35 gigawatt-hours, that will be more battery capacity than the entire world produced in 2014. Tesla has blamed the battery shortage for misses in auto production and they are already planning on building a second Gigafactory. The demand for lithium is suddenly huge and Albemarle is already responsible for 35% of global production.

They reported Q2 earnings of $1.13, up 22%, that beat estimates for $1.11. However, revenue of $737.3 million missed estimates for $740.6 million. They guided for full year earnings of $4.20-$4.40, a 21% rise and revenue of $2.90-$3.05 billion. The revenue miss was due to a divestiture of a specialty chemicals business and currency exchange issues. They repurchased $250 million in stock in the first 6-months of 2017 and paid dividends of $69.8 million.

Next earnings Nov 6th.

Shares declined after the revenue miss but rebounded exactly from long-term uptrend support.

Position 8/22:

Long Oct $120 call @ $1.75, see portfolio graphic for stop loss.

MMM - 3M Co - Company Profile


No specific news. Shares down with the Dow. If we have another down day in the market we are probably going to be stopped. Shares did find some intraday support at 202.50 but it was weak.

Original Trade Description: Aug 9th.

3M Company operates as a diversified technology company worldwide. The company's Industrial segment offers tapes; coated, non-woven, and bonded abrasives; adhesives; advanced ceramics; sealants; specialty materials; separation and purification products; closure systems for personal hygiene products; acoustic systems products; automotive components; and abrasion-resistant films, and paint finishing and detailing products. Its Safety and Graphics Business segment provides personal protection products, traffic safety and security products, commercial graphics systems, commercial cleaning and protection products, floor matting, roofing granules for asphalt shingles, and fall protection products. The company's Health Care segment offers medical and surgical supplies, skin health and infection prevention products, inhalation and transdermal drug delivery systems, dental and orthodontic products, health information systems, and food safety products. Its Electronics and Energy segment provides optical films; packaging and interconnection devices; insulating and splicing solutions; touch screens and touch monitors; renewable energy component solutions; and infrastructure protection products. The company's Consumer segment offers sponges, scouring pads, high-performance cloths, repositionable notes, indexing systems, home improvement and care products, protective materials, and consumer and office tapes and adhesives. Company description from FinViz.com.

On July 25th, 3M reported earnings of $2.58 that missed estimates for $2.59. Revenue of $7.81 billion missed estimates for $7.88 billion. The company guided for full-year earnings of $8.80-$9.05. Traders were in knee-jerk mode and the stock fell $14 on the news.

The miss was minimal and the company did increase earnings 22.6% for the quarter. They reported organic growth of 3.5% and reaffirmed their full year estimate for 3-5% organic growth. There is nothing wrong with this company.

Expected earnings Oct 24th.

Shares have recovered half of their post earnings losses and the dip over the last couple of days has weakened the option premiums to allow us to enter. Resistance is $212.

Bear in mind that the market is struggling and it would not be a surprise to see further declines in the Dow. Today's rebound from the opening drop was encouraging enough for me to take a chance on 3M because MMM shares have already been hit. They could look like a safe port in the coming storm.

If the market does extend its rebound, 3M could be a Dow leader again.

Position 8/10/17:

Long Oct $210 call @ $2.91, see portfolio graphic for stop loss.

VAR - Varian Medical Systems - Company Profile


No specific news. After two weeks of gains Varian was due for some retracement. The weak market helped add the momentum.

Original Trade Description: Aug 2nd.

Varian Medical Systems, Inc. designs, manufactures, sells, and services medical devices and software products for treating cancer and other medical conditions worldwide. It operates through two segments, Oncology Systems and Imaging Components. The Oncology Systems segment provides hardware and software products for treating cancer with radiotherapy, fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; and information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. This segment serves university research and community hospitals, private and governmental institutions, healthcare agencies, physicians' offices, oncology practices, radiotherapy centers, and cancer care clinics. The Imaging Components segment offers X-ray imaging components for use in radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography, computer aided diagnostics, and industrial applications. It also provides Linatron X-ray accelerators, imaging processing software, and image detection products for security and inspection purposes. This segment serves original equipment manufacturers, independent service companies, and end-users. In addition, the company offers products and systems for delivering proton therapy; and develops technologies in the areas of digital X-ray imaging, volumetric and functional imaging, and improved X-ray sources. Company description from FinViz.com.

Expected earnings October 26th.

On July 26th, Varian reported earnings of $1.04 that beat estimates for 95 cents. Revenue of $662.4 million just barely missed estimates for $663.2 million due in part to currency translation issues. They sell their high dollar imaging systems all over the world.

The guided for the current quarter for earnings of $1.15-$1.23 and analysts were expecting $1.18. This should have been positive but the stock fell $6 because of the minor revenue miss.

If the market is going to be historically weak in August, shares that have already been beaten up will fare better than the rest of the market. I am choosing the $105 strike instead of the $100 strike for reduced cost/risk going into August.

Position 8/3/17:

Long Nov $105 call @ $1.75, see portfolio graphic for stop loss.

VIX - Volatility Index - Index Profile


Only a minor gain because the market decline was in slow motion.

Plenty of time with our November option. We still have to get past the budget battle and the debt ceiling fight.

Original Trade Description: July 12th.

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.

Position 7/20/17:

Long Nov $15 call @ $1.85, no stop loss. Target $20 to exit.

BEARISH Play Updates (Alpha by Symbol)

CAH - Cardinal Health - Company Profile


No specific news. Minor gain as investors looked for beaten down stocks.

Original Trade Description: July 29th.

Cardinal Health, Inc. operates as a healthcare services and products company worldwide. The company's Pharmaceutical segment distributes branded and generic pharmaceutical, over-the-counter healthcare, specialty pharmaceutical, and consumer products to retailers, hospitals, and other healthcare providers. It offers distribution, inventory management, data reporting, new product launch support, and contract pricing and chargeback administration services to pharmaceutical manufacturers; pharmacy and medication therapy management, and patient outcomes services to hospitals, other healthcare providers, and payers; consulting, patient support, and other services to pharmaceutical manufacturers and healthcare providers. This segment also operates nuclear pharmacies and cyclotron facilities that manufacture, prepare, and deliver radiopharmaceuticals, as well as operates direct-to-patient specialty pharmacies; offers logistics, marketing, and other services; and repackages generic pharmaceuticals and over-the-counter healthcare products. The company's Medical segment distributes a range of medical, surgical, and laboratory products and services to hospitals, ambulatory surgery centers, clinical laboratories, and other healthcare providers, as well as to patients in the home. This segment also develops, manufactures, and sources medical and surgical products comprising surgical drapes, and gowns and apparel; exam and surgical gloves; fluid suction and collection systems; cardiovascular and endovascular products; and wound care and orthopedic products, as well as assembles and offers sterile and non-sterile procedure kits. In addition, it offers supply chain services, including spend, distribution, and inventory management services to healthcare providers; and post-acute care management, and transition services and software to hospitals, other healthcare providers, and payers. Company description from FinViz.com.

Cardinal reported earnings of $1.31 that beat estimates for $1.24. Revenue of $33.0 billion beat estimates for $32.7 billion. While the company may be winning some market share from McKesson, the cost of the wins means lower margins.

The company said generic deflation and competition was depressing margins. They had previously guided lower for 2018 in April and did it again with earnings. For fiscal 2018 they guided for earnings of $4.85 to $5.10 and analysts were expecting $5.25. They also said earnings would be impacted by some "company discrete items" that could result in a profit decline for the drug business. They reemphasized that in the recent earnings report saying these actions will be detrimental in the short term but improve our trajectory in 2019.

Investors like it when companies build for the future but in the case of CAH, the short term including the rest of 2017 and 2018 is actually long term for traders. They bailed on the stock and it is still falling.

President Trump tweeted about lowering drug prices this morning and it is a good bet it will eventually happen in some form. Just talking about it is going to pressure CAH.

Expected earnings Nov 1st.

Position 8/15/17:

Long Sept $65 put @ 77 cents, no initial stop loss.

DIA - Dow ETF - ETF Profile


Tuesday's short squeeze is fading and we closed at the low for the day. With Trump already saying there will be a government shutdown, the political brinksmanship has begun.

I am recommending we target 213.25 for an exit.

Original Trade Description: July 27th.

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average (the "Index"). The Dow Jones Industrial Average (DJIA) is composed of 30 "blue-chip" U.S. stocks. The DJIA is the oldest continuous barometer of the U.S. stock market, and the most widely quoted indicator of U.S. stock market activity. The DJIA is a price-weighted index of 30 component common stocks.

The Dow closed at a new high in an ugly market solely because of big gains in Boeing, Disney and Verizon. If the rest of the market continues lower, the Dow will eventually crater as well. I am recommending we enter a put position on the Dow ETF at the current high.

Position 7/28/17:

Long Oct $215 put @ $3.33, see portfolio graphic for stop loss.
Short Oct $205 put @ $1.29, see portfolio graphic for stop loss.
Net debit $2.04.

DRQ - Dril-Quip - Company Profile


No specific news. The energy sector was up slightly but DRQ continued its decline.

Original Trade Description: August 19th.

Dril-Quip, Inc., together with its subsidiaries, designs, manufactures, sells, and services offshore drilling and production equipment for use in deepwater, harsh environment, and severe service applications worldwide. It operates through three segments: Western Hemisphere, Eastern Hemisphere, and Asia-Pacific. The company's principal products include subsea and surface wellheads, subsea and surface production trees, subsea control systems and manifolds, mudline hanger systems, specialty connectors and associated pipes, drilling and production riser systems, liner hangers, wellhead connectors, and diverters, as well as consumable downhole products. It also provides technical advisory services, and rework and reconditioning services, as well as rental and purchase of running tools for use in the installation and retrieval of the its products. The company's products are used to explore for oil and gas from offshore drilling rigs, such as floating rigs and jack-up rigs; and for drilling and production of oil and gas wells on offshore platforms, tension leg platforms, and Spars, as well as moored vessels, such as floating production, storage, and offloading monohull moored vessels. Company description from FinViz.com.

The company reported earnings of 9 cents compared to estimates for 1 cent. On the surface, that is a huge beat. Unfortunately it was down from a 64 cent profit in the year ago quarter. Revenue of $127.9 million declined from $142.2 million but still beat estimates for $102 million. So far, so good.

Selling, G&A expenses rose from $5.8 million to a whopping $31.2 million. Total expenses rose from $97.2 million to $129 million. On an operating basis they lost $1.1 million compared to net income of $45.2 million in the year ago quarter. Order backlogs fell from $296 million to $235 million.

While earnings and revenue beat significantly lowered estimates, they were dramatically below year ago levels. Everything is working against Dril-Quip because offshore drilling is rapidly shrinking because of the low cost of oil. It is not profitable to produce oil at $75-$85 a barrel when it is selling for less than $50. Offshore oil rigs in the U.S. have fallen from more than 50 to only 16.

Dril-Quip is actually a good company but the offshore sector is in serious pain. Their benefitting from the various gas wells being drilled overseas where multiple giant gas fields have been discovered. It will be enough to keep the bills paid but long-term, oil prices will have to rebound before DRQ can return to hero status.

With the summer driving season almost over, crude prices are likely to move lower than higher over the next couple of months.

Expected earnings Oct 26th.

Position 8/21/17:

Long Dec $35 put @ $1.65, see portfolio graphic for stop loss.

IBM - International Business Machines - ETF Profile


Morgan Stanley reiterated an outperform rating with a $192 price target. That would be a 35% gain. Shares rebounded to resistance and then faded slightly.

Original Trade Description: July 29th.

International Business Machines Corporation provides information technology (IT) products and services worldwide. Its Cognitive Solutions segment includes Watson, a cognitive computing platform that interacts in natural language, processes big data, and learns from interactions with people and computers. The company's Cognitive Solutions segment also offers data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and solutions tailored by industry; and transaction processing software that runs mission-critical systems in banking, airlines, and retail industries. The company's Global Business Services segment offers business consulting services; delivers system integration, application management, maintenance, and support services for packaged software applications; and business process outsourcing services. Its Technology Services & Cloud Platforms segment provides cloud, project-based, outsourcing, and other managed services for enterprise IT infrastructure environments. This segment also offers technical support, and software and solution support; and integration software solutions. The company's Systems segment offers servers for businesses, cloud service providers, and scientific computing organizations; data storage products and solutions; and z/OS, an enterprise operating system for z systems. It has a strategic collaboration with ABB Ltd to develop industrial artificial intelligence solutions. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. Company description from FinViz.com.

Expected earnings October 17th.

IBM reported revenue of $19.29 billion, down -5% annually and the 21st consecutive quarterly decline. Analysts were expecting $19.49 billion and that was already on the low side. Earnings were $2.97 and beat estimates for $2.74 thanks to a lower tax rate of 9.2%. Full year guidance was reiterated for "at least" $13.80. Several years ago, they made a big deal out of forecasting $20 a year in earnings. That is not likely to happen in this decade. All five of IBM's reporting segments posted revenue declines.

The problem with IBM is the lack of a light at the end of the tunnel. There is no way out of this problem without major changes which could include splitting the company up or going on an acquisition spree. Shares hit $182.50 in February but hopes have now been dashed twice with Q1 and Q2 earnings. The outlook is dim.

If the market were to roll over and the Dow decline materially, IBM would be a leader in that decline. It has been losing ground even when the Dow is setting new highs.

With earnings Oct 17th we can use the Oct options which expire on the 20th. They should hold their premium well.

Update 8/5/17: Wedbush initiated coverage with a neutral rating saying IBM is going to face "structural headwinds" and free cash flow will continue to be consumed by "aggressive M&A." The analyst said the world has moved away from the labor intensive model of IT services with cloud computing and cloud software replacing those IT consultants. Legacy IT services contracts are going to see margins decline due to "pricing resets" and an industry wide "skills mismatch." He said IBM's lack of transparency about its current business models suggests they are lagging the evolution curve.

Update 8/7/17: A judge in Indiana ruled IBM must pay the state $78 million for failing to complete the automation of much of the state's welfare services system. The court case came after the state cancelled the $1.3 billion automation contract because of numerous complaints about long wait times, lost documents and improper rejections. An appeals court found that IBM had committed a material breach of its contract by failing to deliver improvements to the welfare system.

Position 7/31/17:

Long Oct $140 put @ $3.10, see portfolio graphic for stop loss.

SPY - S&P-500 ETF - ETF Profile


Tuesday's short squeeze faded and confirmed the candle as a lower high. The next support level is $240.50.

I am recommending we target $241 for an exit.

August has been down 5 of the last 7 years and up only 5 of the last 20 years.

Original Trade Description: July 24th.

The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index (the "Index") The S&P 500 Index is a diversified large cap U.S. index that holds companies across all eleven GICS sectors.

The S&P is marching slowly towards a date with destiny and 2,500. Since the median estimate by the top 16 analysts was a 2,450 yearend price target on the S&P, the arrival at 2,500 could be a tripwire that triggers an August correction. We have not had a 5% drop in a year and it has been 9 months since a 3.5% decline. With earnings rapidly playing out and most of the high profile companies will finish reporting by next Wednesday, I am going to recommend a bearish position for August/September.

I am going to set an entry trigger for a SPY put with the S&P at 2,495. Since aggressive traders normally want to anticipate a particular number, I want to enter the position just before we reach that level.

Update 7/26/17: The Dow was up +100 points, Nasdaq +10, Nasdaq 100 +20 and the S&P only gained 70 cents. The Russell 2000 lost -6 and the S&P-400 lost -15. We may not get to that 2,495 level. I am going to add another trigger/strike in case we get a failure from this level.

Position 7/27/17 with a S&P trade at 2,465:

Long Oct $243 put @ $3.65, see portfolio graphic for stop loss.

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