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Daily Newsletter, Wednesday, 11/15/2017

Table of Contents

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

Market Wrap

Bulls Hang Tough

by Keene Little

Click here to email Keene Little
Looking at the behavior of the market the past several trading days shows a repeating pattern of gaps to the downside each morning followed by a recovery attempt for the rest of the day. The result has given us a choppy pullback, which is potentially bullish, but the series of lower highs and lows is a warning sign that a stronger selloff could be next.

Today's Market Stats

I apologize for the lateness of tonight's report. I apparently caught Jim's computer bug this afternoon and it crashed my computer. I spent more time than expected recovering my charts.

As for the market, the repeating pattern over the past several days shows the dipsters remain alive and active as they keep doing what has worked so well for them for a very long time. Bulls believe they should keep buying the dips since they'll be rewarded with higher prices. After all, the market always goes up, or so most traders have been conditioned to believe. And who's to argue they're wrong when in fact they've been proven right for many years now. Anyone new to trading since 2009 only knows a bull market and only knows how to employ bull market tactics. How do I know this? I was one of those traders back in 2000.

When I became an active trader in 2000 I knew only a bull market and in fact the strongest bull market that anyone had known since perhaps the rally in the late 1920's. It was "different this time" as technology was changing the world. The joke back then was to buy calls on Monday, come back on Thursday to take your profits and then take a 3-day weekend. After the top in March 2000 I bought dips along with everyone else and I continued to get hammered by the failure of the dips to gain traction and I became part of the group that kept getting forced out of positions and adding to the selling pressure as the market broke down.

It was not a fun time to be a die-hard bull and let's just say I paid a very high price for tuition as I learned how to trade a bear market. That tuition cost was fully recovered, and then some, in the next bear market following the 2007 top. I'm an eternal optimist but I love trading bear markets because of the inflated option premiums -- you gain on a put play from both a price decline and inflated premiums -- and the moves happen much faster. I had a lot more fun in 2008 than I did in 2000-2001.

I fully suspect we're going to see a whole new batch of traders pay a high tuition price once this bull market is done. Learning to play the market in both directions is an awesome way to pull money out of the market no matter which cycle we're in and all we have to do is figure how when it's time to switch sides.

Switching from a bull to a bear is especially hard since market tops tend to be choppy affairs and often form rounding tops for that reason. Bottoms, for stocks, tend to be spike reversals following a high-volume puke of positions by retail traders. Those are easier to identify than the crappy choppy topping patterns, which is what I think we're experiencing now. They're actually good times to back away from the market and avoid the chop.

Active traders have a difficult time not trading and they don't like being flat, even though that is oftentimes the best trading position to be in. Knowing when to be out of the market is what's needed to preserve trading capital for those times when the trend is more easily identifiable. With SPX trading where it was a month ago, with a lot of whoppy (that's choppy and whippy) price action in between I don't think either side has had much fun being in the market.

The big question of course is whether or not the bull market from 2009 is complete or if it instead has further to go. And even if it's not complete we could be setting up for at least a larger pullback correction before the bull gets back in the driver's seat. Even the short-term pattern is not clear enough yet to determine whether the pullback from the November high is just a small correction or something more bearish.

One of the problems with the recovery attempts over the past several days is that the market breadth is terrible. While most of the days have been spent recovering from quick selloffs in the mornings the advance-decline line and volume show the recovery attempts are on the backs of fewer and fewer stocks. The a-d line and volume have stayed in negative territory, today included, and that shows us there is stronger selling beneath the surface of the market, which we see as the broader stock indexes. Prices haven't moved much, which keeps things looking relatively strong, but there's greater weakness than what we're seeing in the prices. This follows warning signs from bearish divergence at the November high.

As for today, there was weakness from the overnight selling in the futures but there was a recovery attempt a few hours before our open. In our pre-market session, while the market hasn't been paying much attention to the economic reports, there was a little more weakness following the 8:30 reports.

We got some more inflation data with the CPI reports, which came in as expected (CPI +0.1%, Core CPI +0.2%) and an increase from September's +0.5% and +0.1%, resp. The Fed has the green light to raise rates if they think the inflation data is more than "transitory."

Retail sales came in at +0.2%, which was a disappointing drop in October from +1.9% in September (revised higher from the previously reported +1.6%). Ex-auto the sales dropped from +1.2% in September to only +0.1% in October and the slowdown in retail sales is always worrisome with an economy so dependent on consumer spending.

The Empire Manufacturing index also shows a disappointing drop from 30.2 in October to 19.4 in November. That was also less than the 26.0 that had been expected. Business inventories were flat in September after building up+0.6% in August and that's going to have a negative effect on GDP. That could worry the Fed if they see a trend here.

Our day started with a big gap down and hard selling for the first 10 minutes which was then followed by a recovery effort for the rest of the day. One small difference between today and previous days was a little more price weakness in the afternoon -- the morning bounce did not get the follow through to the upside like we've seen in previous days. That might be further bearish evidence of what could turn into a stronger pullback and possibly the start of something more bearish. It's still a little early to tell what this market has up its sleeve.

SPX remains a good proxy for the market, although I've been watching the RUT carefully as our canary index. When the RUT falls off its perch, which it's threatening to do, it will be a good signal for the bulls to get out of the mines quickly. But there's no clear breakdown yet and therefore bears have to continue respecting the upside potential for the rally to continue into and maybe through the upcoming holidays. I'll start off with the SPX weekly chart to show the first chink in the bull's armor.


S&P 500, SPX, Weekly chart

Since the beginning of October SPX has been nuzzling up underneath the trend line along the highs since April 2016, along with the midline of its up-channel form 2010-2011. Last week's little spinning top doji has been followed with a small red candle and if the week finishes with a red candle it could be interpreted as a reversal pattern at resistance. The rising wedge for the rally from February 2016 can be considered complete at any time but as of yet there is no evidence that a top is in place. Caution by both sides is warranted here.


S&P 500, SPX, Daily chart

Since October 27th SPX has been using 2566 as support, which can be seen on the daily chart below with the spikes down on November 2nd, 9th and yesterday, followed by recoveries off the 2566 lows. But today it closed at 2564.62 so a slight break below support. In addition to price-level support at 2566 there is also the top of a parallel up-channel from April-May that was back-tested yesterday.

SPX had broken above this channel on October 4th and back-tested a few times since. The failure to hold above the top of this channel today is another feather in the bear's cap and now all they need is follow-through selling on Thursday. Otherwise today could turn into a little bear trap that will lead to the launch of another rally to new highs and potentially into December. The dipsters could still be rescued with another rally.

There is a possible small H&S topping pattern with the neckline at 2566 and a drop below 2566 would open the door to a drop to the 2535 area, which is the price objective from the H&S pattern. An uptrend line from February-November 2016 is currently near 2538 and the 50-dma is near 2443. What the bears really need to see is a drop below the October 25th low at 2544 since that would confirm an important high is in place. Until that happens there remains the potential for a continuation of the leg up from October 25th.

Key Levels for SPX:
- bullish above 2597
- bearish below 2544


Dow Industrials, INDU, Daily chart

The Dow has the same possible H&S topping pattern as mentioned for SPX above. The neckline is near 25330 and like SPX it was broken today, which means the bulls need a quick recovery on Thursday and no later than Friday. A one-day break is so far just a head-fake break and the bears need some follow-through selling to confirm the break. Another gap-down start to the day would therefore be more bearish now and dipsters might find the market is not going to recover enough for them. The close on Friday, for the week, is going to be an important one.

Key Levels for DOW:
- bullish above 23,602
- bearish below 23,330


Nasdaq-100, NDX, Daily chart

Following its high on November 8th NDX rolled over from the top of its up-channel from July and the oscillators are in full sell mode. But the pullback is choppy and therefore fits as just a pullback correction to the rally. Also supporting the bullish argument is the fact that price remains above its 20-dma and midline of its up-channel, near 6220 and 6210 resp. The bears would be in a stronger position with a break below those support levels and its November 2nd low at 6194, in which case we could see NDX drop down to the bottom of its up-channel, near 6050.

Key Levels for NDX:
- bullish above 6347
- bearish below 6194


Russell-2000, RUT, Daily chart

As mentioned earlier, the RUT is my canary index and at the moment it's looking either drunk or hypoxic as it wobbles on its perch. If it falls off its perch the bulls need to be looking for the nearest exit. This morning's selloff had the RUT breaking support near 1466, which is its trend line along the highs from 2007-2015, which the RUT was using as support since November 9th until it broke this morning.

The RUT again found support this morning at the bottom of an expanding triangle (the trend line along the lows since October 4th) after a small throw-under below the line with the gap down and quick selloff. Now all the bulls need is a close back above the 2007-2015 trend line and a rally back above its broken 50-dma nearing 1480. That would be the first bullish sign for the RUT and a reason to believe we could get one more rally leg into the end of the month. The bears need to pressure the bulls into more selling with a drop below this morning's low at 1454.

Key Levels for RUT:
- bullish above 1513
- bearish below 1465


Russell-2000, RUT, 60-min chart

A closer view of the RUT's pattern shows how choppy it's been since the high on October 5th. This is one of the reasons why the pattern fits as a bullish consolidation that will lead to another rally. This potential must be respected by the bears and this morning's quick throw-under below the bottom of the expanding triangle might have been the final flush that will now lead to the resumption of the rally.

The RUT's bounce off this morning's low ran into its downtrend line from November 6th and was again rebuffed by trendline resistance. Currently crossing the 2007-2015 trend line near 1466, the bulls need to get the RUT above this level to at least open the door to a new rally. The rally might lead to just a bounce correction before heading lower but that will have to be figured out later. What happens the next two days and how the RUT closes this week will tell us how the rest of the month is likely to go.


Volatility index, VIX, Weekly chart

A little more fear is showing up in the market, reflected with a rally in the VIX the past two weeks. The top of its descending wedge, now near 15, is close to being tested again. Today's high was a test of its 200-week MA at 14.53 (with a high at 14.51) and any further selling would likely see the VIX pop above 15. Otherwise another rally in the stock market could drop the VIX back down to the bottom of its descending wedge, near the December 2006 low at 8.60. The bullish divergence with this bullish descending wedge says this pattern is eventually going to break to the upside and it will likely spike hard to the upside, which should spike the VIX quickly up to 30 (wedges are typically retraced quickly).


KBW Bank index, BKX, Daily chart

Following the money in this market means we should follow BKX, which is currently looking at least a little better lately with its recovery back above its 50-dma, which it had broken below on November 9th. It closed back above the 50-dma on Monday and continues to hold above it following each morning's gap back down below the MA and then recovery back above it.

So far the bounce off Monday's low is only a 3-wave move with two equal legs up at 99.46. Today's high was 99.49 is only pennies shy of a 50% retracement of its decline. So far the bounce fits as just an a-b-c correction to the decline and it could turn back down from here. As with the broader market, each side has to press their case from here and we should know by Friday's close how next week is likely to go.


Transportation Index, TRAN, Daily chart

The TRAN continues to act much weaker than the broader indexes and today it broke and closed below its uptrend line from May-August. It's just a one-day break so far and could quickly recover but as with the others, it's a notch in the bear's gun today. The bulls need to see the TRAN back above the trend line and price-level S/R near 9490. If they can do that before Friday's close then today will be no harm no foul. Otherwise, like the RUT, this index is a good indication of the broader health of the economy, which eventually will be reflected by the stock market.


U.S. Dollar contract, DX, Daily chart

The US$ broke support on Tuesday by dropping below its uptrend line from September 20th, which indicates that rally leg is likely finished. The bullish interpretation of that leg is a 1st wave in what will become a larger rally. That means the current pullback from November 7th is a 2nd wave correction, which has retraced only 38% of the 1st wave so far. A more likely pullback correction would be 50%-62%, which is roughly 92-93 (this morning's low was 93.30. We might see a little bounce back up to price-level S/R at 94 before dropping down to back-test the top of its broken down-channel for the January-September decline, which is currently near 92.95. A drop below the October 13th low at 92.59 would be more bearish.

One bearish development is the dollar's drop back below 94, which from a bullish perspective is the neckline of an inverse H&S pattern. Dropping back below the line leaves a failed breakout and that suggests the dollar could head lower from here. It didn't reach the trend line along the lows since February 2015, near 90, in September and that could still be a magnet for the dollar before it will be ready for a stronger rally.


Gold continuous contract, GC, Daily chart

On October 26th gold broke support at its uptrend line from July 10 -October 6 and has continued to hug the line from underneath since the end of October, including another test of the line today. In addition to that line of resistance gold nearly back-tested its broken 50-dma near 1291 with this morning's high at 1290. The last back-test of the 50-dma was October 13th and that was followed by a selloff back down to its broken downtrend line from 2011-2016.

Gold has effectively been trapped between trendline and MA support and resistance that's currently at about 1257 and 1291, resp., and a break one way or the other will likely lead to a strong move. Right now I'm leaning toward a breakdown instead of a rally but it's also going to be somewhat dependent on what the dollar does from here.


Oil continuous contract, CL, Daily chart

Oil dropped sharply on Tuesday but held above its 20-dma. Today's little doji consolidation continued to hold above the 20-dma, now near 54.80, with this morning's low at 54.88. The November 8th high at 57.92 fits well as the completion of the corrective bounce pattern for the rally from June and that corrective pattern suggests the whole thing will be retraced. It's a little early to say the next decline has started but that's the bearish setup. A drop below the 20-dma would be the first warning shot for oil bulls to pay attention to. In the meantime there remains further upside potential to the 59-62 area.


Economic reports

Thursday morning's economic reports include the unemployment claims data, some pricing data, Philly Fed index, Industrial Production and Capacity Utilization, all of which are not expected to have changed much from previous reports. The market has essentially been ignoring reports anyway but watch the pre-market futures to see if there's any movement from an unexpected result. Friday's reports will be more housing data.


Conclusion

The stock market looks like its hanging on the edge of a cliff and the bears are slowly prying back the bull's fingers. The bulls need to add a little spinach to their alfalfa and get some strength to pull themselves back up on the ledge and kick the bears back. Recovery attempts following multiple gap-down starts to the days are using up what little buying strength there appears to be. Market breadth is terrible and even with the days spent mostly recovering from an early selloff the advance-decline line and volume remain in the red and it shows a clear lack of participation by the majority of stocks. It looks more like an effort to hold the major averages up so as not to scare the sheeple into selling.

The result of the effort to hold things up while the market deteriorates further actually makes the market more vulnerable to a strong selloff. The bulls need a stronger recovery and they need it fast in order to shove the shorts back out of the market. One thing in favor of the bulls is the upcoming holiday next week. We have a typically bullish week this week (opex), although that hasn't prevented the market from pulling back, and then the holiday-shortened week next week is typically bullish.

The bottom line is that we have a choppy pullback that fits as a correction to the rally and that should be enough to keep bears on the defensive. It doesn't prevent a breakdown from here but it would be starting from what looks like a pullback correction and therefore any further decline is suspect. Having said that, a corrective pattern that suddenly lets go to the downside is usually followed by a very strong selloff (think mini-crash leg down) and therefore it's not a good time for bulls to be complacent about their usual expectation for another recovery. This one might catch a lot of bulls flat footed (flat hooved?).

That means both sides can't make any assumptions here and it's the reason why I recommend a flat position. You might not like that position but in times of uncertainty it's better to miss a move than to be caught on the wrong side of a fast move.

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

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

Post Earnings Depression

by Jim Brown

Click here to email Jim Brown

Editors Note:

This stock suffered through its depression period and is now positive again. Shares of McKesson were crushed by the guidance.



NEW DIRECTIONAL CALL PLAYS

MCK - McKesson - Company Profile

McKesson Corporation provides pharmaceuticals and medical supplies in the United States and internationally. The company operates in two segments, McKesson Distribution Solutions and McKesson Technology Solutions. The McKesson Distribution Solutions segment distributes branded and generic pharmaceutical drugs, and other healthcare-related products; and provides practice management, technology, clinical support, and business solutions to community-based oncology and other specialty practices. This segment also provides specialty pharmaceutical solutions for pharmaceutical manufacturers; and medical-surgical supply distribution, logistics, and other services to healthcare providers. In addition, this segment operates retail pharmacy chains in Europe and Canada, as well as supports independent pharmacy networks in North America and Europe; and supplies integrated pharmacy management systems, automated dispensing systems, and related services to retail, outpatient, central fill, specialty, and mail order pharmacies. This segment serves retail national accounts, including national and regional chains, food/drug combinations, mail order pharmacies, and mass merchandisers; and institutional healthcare providers, such as hospitals, health systems, integrated delivery networks, and long-term care providers, as well as offers its services to pharmaceutical manufacturers. The McKesson Technology Solutions segment provides clinical, financial, and supply chain management solutions to healthcare organizations. McKesson Corporation was founded in 1833 and is headquartered in San Francisco, California. Company description from FinViz.com.

Earnings Jan 25th.

McKesson reported earnings of $3.28 that beat estimates for $2.80. Revenue of $52.06 billion beat estimates for $51.73 billion. So far, so good. However, they lowered 2018 guidance from $7.10-$9.00 to $4.80-$6.90. There were multiple reasons for the lowered guidance and none of them were sales related.

Amortization of acquisition related intangibles of $2.40-$2.70. Acquisition related expenses and adjustments of $.90-$1.10. Inventory related charges for LIFO adjustments of up to 20 cents. Restructuring charges of $1.10 to $1.40. "Other" adjustments of $1.40-$1.60. Given all those charges it is amazing they had any earnings left.

However, the line everyone overlooked was the guidance for "adjusted" earnings without those charges and that was $11.80-$12.50 for 2018. If you put a market PE of 18 on earnings of $12, you get a $216 share price. MCK shares were $138 today.

Shares have been holding over support at $135 for three weeks and suddenly rebounded $2.69 today in a very weak market. This relative strength should protect us against a further market decline.

Options are expensive so you can use the optional short call to make it a spread.

Buy Feb $145 call, currently $5.00, initial stop loss $132.85.
OPTIONAL: sell short Feb $160 call, currently $1.10, initial stop loss $132.85.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Close Under Support

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market weakness moved into a new chapter on Wednesday as indexes closed under short-term support. The Dow closed at 23,271 and below support at 23,300 and it closed near the lows for the day. The intraday rebound failed and selling increased into the close. The S&P closed just below support at 2,565 and not yet in danger but the Russell 2000 dropped another 7 points and is looking even more bearish.

I am leaving most of the stop losses wider than normal in hopes we will not be stopped if the market really does take a dive.



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


AABA - Altaba
The long call position was stopped at the open.



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

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Long and short equity trades = Premier Investor



BULLISH Play Updates

AABA - Altaba - Company Profile

Comments:

The market imploded at the open and the Nasdaq dropped -70 points. Alibaba fell -$5 and we were stopped out on the AABA position. Alibaba rebounded to close flat but we were already out.

Original Trade Description: October 18th.

Altaba Inc. operates as a non-diversified, closed-end management investment company in the United States. Its assets consist primarily of equity investments, short-term debt investments, and cash. The company was formerly known as Yahoo! Inc. and changed its name to Altaba Inc. in June 2017. Altaba Inc. was founded in 1994 and is based in New York, New York. Company description from FinViz.com

Altaba owns a 15% stake in Alibaba, currently worth about $70 billion. They hold a stake in Yahoo Japan currently worth $7.7 billion. They have $130 million in investments. They have a $740 million stake in Excalibur, a unit of the new company that holds all the Yahoo patents that were not sold to Verizon. The company has $12 billion in cash. They recently announced a $5 billion stock buyback and the company has committed to returning nearly all the cash in the bank plus any thrown off by the investments, to the shareholders.

Owning Altaba is just like owning Alibaba only without the expensive options and a lot less volatility. We get the other parts for free. Obviously Altaba is reactive to Alibaba movement so there will still be some volatility, it is just comes with a lower risk.

Alibaba is growing much faster than Amazon and they have a larger market with 4.5 billion consumers in Asia.

Alibaba reports earnings on Nov 2nd and Altaba reports on Nov 29th. Because of the lower volatility and cheaper option prices, we can own AABA over the BABA earnings and profit from any post earnings gains.

Last week Alibaba said it was going to spend an additional $15 billion over the next three years on research. They already spend $3 billion and have more than 25,000 engineers on the payroll.

The new effort will create the Alibaba DAMO Academy, short for Discovery, Adventure, Momentum and Outlook. The academy will set up labs in China, USA, Russia, Israel and Singapore and fund collaborations with universities. They plan to explore AI, IoT, quantum computing, visual computing, machine learning and network security.

BABA shares fell $6 on the announcement because of the impact to profits. AABA shares followed Alibaba shares down and they bounced today off the 30-day average, which has been strong support. If the trend holds, this should be a buying opportunity.

Update 11/2: Alibaba reported an outstanding quarter with a 61% rise in revenue. They raised guidance for 2018 for a 49-53% rise in revenue, up from prior guidance of 45-49%. Their cloud computing business revenue rose 99%. Earnings of $1.29 bear estimates for $1.04. Revenue of $8.29 billion beat estimates for $7.86 billion. Monthly actuve users rose 3.8% to 549 million. The current quarter is going to show explosive growth given the expanded Single Day promotion.

Update 11/13: Alibaba shares rose slightly after the new record of $25.3 billion in Singles Day sales. Then investors sold the news. A key point that is not getting any press is that Alibaba is extending many of the promotions for the 24 days starting with Singles Day. That means Q4 earnings are going to have 23 extra days of sales hype.

I am using the Jan options so there will still be earnings expectations in the premium when we exit.

Position 11/10/17:

Closed 11/15/17: Long Jan $72.50 call @ $3.48, exit $2.12, -$1.36 loss.

Position 10/19/17:
Previously Closed 11/9: Long Jan $70 call @ $3.10, exit $3.72, +.62 gain.


COST - Costco - Company Profile

Comments:

No specific news. Big decline after a couple weeks of big gains. Costco started its Black Friday specials last week and the first grop expires on Thursday when a new batch will begin. This is going to be a good season for Costco.

Original Trade Description: October 14th.

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online. Company description from FinViz.com.

We all know the story. Amazon bought Whole Foods and Costco shares lost over $30. Fast forward three months and Costco reported strong earnings but analysts still believed Whole Foods was going to kill them. Shares fell $13.

Let me put this in caps. IGNORE WHOLE FOODS. They are an entirely different business model and even with Amazon behind them, they are no threat to Costco. Costco operates 741 retail warehouses, each 4 times bigger than a Whole Foods store. Whole Foods only has 346 stores. At Costco you can buy food, diamond rings, cameras, large screen TVs, clothing, drugs, discount eye glasses, GE appliances, cruises to anywhere in the world and caskets among thousands of other items. Whole Foods has food.

Costco reported earnings of $2.08 that beat estimates for $2.02. Revenue of $42.3 billion beat estimates for $41.55 billion. Those numbers were up from $1.77 and $36.56 billion in the year ago quarter. US same store sales were up 6.5% and online sales were up 30%. There was NO weakness from the Whole Foods acquisition.

Paid memberships rose 274,000 to 18.5 million. That equates to an addition of 16,000 per week. Business members had a 94% renewal rate and Gold Star members an 89.3% renewal rate. They ended the quarter with $5.78 billion in cash, up more than $1 billion from the year ago quarter.

Costco rolled out a free two-day delivery service for orders over $75 with same day delivery at 376 stores through Instacart.

Shares were knocked for a loss despite the strong results because analysts are still only looking at the surface comparisons between Whole Foods and Costco. The decline stopped at $155 and did not even come close to strong support at $155. The weakness lasted five days.

On Friday, JP Morgan released the results of a recent survey showing Costco grocery prices were a whopping 58% cheaper than Whole Foods. JP Morgan said Whole Foods and Costco actually have very little in common other than a few grocery items and Costco wins hands down.

That report lifted Costco shares by $2.63 on Friday but the stock has a long way to go to recover lost ground.

I looked at the December option with only 48 days left because it was cheaper but I chose the January option with 97 days left because it expires after their January 4th earnings and will retain its premium better. We can always buy time but we do not have to use it.

Update 10/18: Reuters released a survey of 8,600 online shoppers and 75% said they never or rarely by groceries online. While that should have been negative to Amazon and the Whole Foods purchase, it weighed on COST as well because of their efforts to accelerate their online business. Amazon fell $12 on the news.

Update 10/20: Oppenheimer reiterated an outperform rating and $185 price target. They listed 5 reasons why Costco is still a buy. Management optimism, credit card change is over, the new delivery options are just starting, IT investments over the last several years are paying off and costs are declining, improved advertising showing the extended benefits of being a member.

Update 11/2: Costco reported a 10.1% increase in sales for October to $10.02 billion. For the first 8 weeks of their fiscal 2018 sales have risen 11.3% to $19.87 billion. Same store sales for that 8-week period was +8.1% in the USA, +9.0% in Canada, +9.3% international. Companywide comps sales were +8.3% with a 32.2% in ecommerce sales. I can't wait to see the Whole Foods comp sales numbers but I doubt Amazon will break them out. There is ZERO impact on Costco from the Whole Foods/Amazon acquisition.

Position 10/16/17:

Long Jan $165 call @ $3.85, see portfolio graphic for stop loss.


FB - Facebook - Company Profile

Comments:

No specific news. Shares are still consolidating from their earnings bounce. There was a big dip at the open with the market but shares rebounded to close flat and back over short term support.

Original Trade Description: November 13th

Facebook, Inc. provides various products to connect and share through mobile devices, personal computers, and other surfaces worldwide. Its solutions include Facebook Website and mobile application that enables people to connect, share, discover, and communicate each other on mobile devices and personal computers; Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application to communicate with people and businesses across platforms and devices; and WhatsApp Messenger, a mobile messaging application. The company also offers Oculus virtual reality technology and content platform, which allow people to enter an immersive and interactive environment to play games, consume content, and connect with others. As of December 31, 2016, it had approximately 1.23 billion daily active users. Facebook, Inc. was founded in 2004 and is headquartered in Menlo Park, California. Company description from FinViz.com.

Everyone should know this story. There is no need to go into lengthy detail on this tech giant. They posted blow out earnings and spiked from $170 to $183. Shares have traded sideways to down for the last two weeks but they have quit declining with three consecutive days at $178.

Analysts are targeting well over $200 because Facebook is printing money. Their growth is outstanding and they still have numerous web properties they have not yet monetized. They are launching Facebook TV, original content, the list of new opportunities is endless.

RBC Capital raised their price target from $190 to $230 to match Mizuho. Monnes Crespi Hardt is $210, Aegis Capital $215, Needham $215, etc. There is plenty of upside from here. Facebook is the largest earnings grower in the space.

They have eradicated Snapchat. Apple reported that Snapchat is no longer in the top 10 downloads from the Apple store.

I believe FB is about to break out of its post earnings depression phase and begin a new move higher. The option premiums are very high so I am recommending a February spread to capture inflated option premiums ahead of earnings.

Position 11/14/17:

Long Feb $185 call @ $6.33, see portfolio graphic for stop loss.
Short Feb $200 call @ $2.30, see portfolio graphic for stop loss.
Net debit $4.03.


GILD - Gilead Sciences - Company Profile

Comments:

No specific news. Shares dipped with the market at the open but rebounded strongly.

Original Trade Description: November 7th

Gilead Sciences, Inc. discovers, develops, and commercializes medicines in the areas of unmet medical needs in Europe, North America, Asia, South America, Africa, Australia, India, and the Middle East. The company's products include Descovy, Odefsey, Genvoya, Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Emtriva, Tybost, and Vitekta for the treatment of human immunodeficiency virus (HIV) infection in adults; and Vemlidy, Epclusa, Harvoni, Sovaldi, Viread, and Hepsera products for treating liver diseases. It also offers Zydelig, a PI3K delta inhibitor, in combination with rituximab, for the treatment of certain blood cancers; Letairis, an endothelin receptor antagonist for the treatment of pulmonary arterial hypertension; Ranexa, a tablet used for the treatment of chronic angina; Lexiscan/Rapiscan injection for use as a pharmacologic stress agent in radionuclide myocardial perfusion imaging; Cayston, an inhaled antibiotic for the treatment of respiratory systems in cystic fibrosis patients; and Tamiflu, an oral antiviral capsule for the treatment and prevention of influenza A and B. In addition, the company provides other products, such as AmBisome, an antifungal agent to treat serious invasive fungal infections; and Macugen, an anti-angiogenic oligonucleotide to treat neovascular age-related macular degeneration. Further, it has product candidates in various stages of development for the treatment of HIV/AIDS and liver diseases, such as hepatitis C virus and hepatitis B virus; hematology/oncology; cardiovascular; and inflammation/respiratory diseases. The company markets its products through its commercial teams and/or in conjunction with third-party distributors and corporate partners. Gilead Sciences, Inc. has collaboration agreements with Bristol-Myers Squibb Company, Janssen R&D Ireland, Japan Tobacco Inc., Galapagos NV., and Spring Bank Pharmaceuticals, Inc. Company description from FinViz.com.

Earnings January 25th.

Shares of Gilead surged in late August after the company raised guidance on drug sales. Those gains faded as they approached the Q3 earnings date. The declined even further after the company lowered guidance on sales because of increased competition. However, producing $25 billion a year in revenue and having multiple drugs in the pipeline with one of them expected to produce $3.5 billion in 2018, is a reason to buy this stock on a dip to support.

The company reported earnings of $2.27 compared to estimates for $2.13. Revenue of $6.5 billion also beat estimates for $6.4 billion. Net income was $2.7 billion.

Gilead bought Kite Pharma for $12 billion earlier this year to gain access to their cancer immunotherapy drugs. The company is working on logistics for for launching sales of the newly approves non-Hodgkin lymphoma drug Yescarta developed by Kite. The drug costs $373,000 for a one-time treatment.

Gilead warned that Hep-C revenue was declining as fewer patients were deemed eligible for treatment and there was higher competition from companies like AbbVie. Sales of their Hep-C drugs declined from $3.3 billion to $2.2 billion in Q3. They lowered full year guidance for Hep-C from $9.5 billion to $9.0 billion.

At the same time they raised full year guidance on all sales from $24.0 billion on the low side to $24.5 billion with the upper rage at $25.5 billion.

While Hep-C sales may be slowing thanks to a 95% cure rate there are plenty of other drugs in the pipeline. Gilead has plenty of cash to develop and market new drugs. This is a good company and the drop to support is a buying opportunity.

Update 11/8/17: Mizuho raised the price target to $83. The analyst said Gilead did not overpay for Kite given the strength of the drug pipeline. Recent trial results have been positive on multiple drugs. The analyst reminded that Gilead paid $11 billion for Pharmasset in 2011 that enabled them to corner the Hep-C market for 5 years.

Position 11/8/17:

Long Feb $75 Call @ $3.45, see portfolio graphic for stop loss.


MDCO - Medicines Co - Company Profile

Comments:

No specific news. Weak market casualty with a -2.5% decline.

Original Trade Description: November 8th

The Medicines Company, a biopharmaceutical company, provides medicines for patients in acute and intensive care hospitals worldwide. The company markets Angiomax, an intravenous direct thrombin inhibitor used as an anticoagulant in combination with aspirin in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty, and for patients undergoing percutaneous coronary intervention; Ionsys, a fentanyl iontophoretic transdermal system for the short term management of acute postoperative pain for adults requiring opioid analgesia in the hospital. It also markets Minocin IV, an intravenous formulation of a tetracycline-class antibiotic used for the treatment of infections due to susceptible strains of designated gram-negative bacteria; and Orbactiv, an intravenous antibiotic used for the treatment of adult patients with acute bacterial skin and skin structure infections, or caused or suspected to be caused by susceptible isolates of designated gram-positive microorganisms. The company's approved products include Adenosine, Amiodarone, Esmolol, and Milrinone for acute cardiovascular; Azithromycin and Clindamycin for serious infectious disease; and Haloperidol, Midazolam, Ondansetron, and Rocuronium for surgery and perioperative treatment. Its research and development stage products comprise Carbavance, an antibiotic agent that has completed Phase III development stage for the treatment of hospitalized patients with serious gram-negative bacterial infections; Inclisiran, a synthesis inhibitor for the potential treatment of hypercholesterolemia; and MDCO-700, an intravenous anesthetic agent developed for moderate or deep sedation and general anesthesia in patients undergoing diagnostic or therapeutic procedures. The Medicines Company has a collaboration agreement with Alnylam Pharmaceuticals, Inc.; SciClone Pharmaceuticals; and Symbio Pharmaceuticals Limited. Company description from FinViz.com.

Earnings January 25th.

MDCO reported a loss of $1.19 that beat estimates for a loss of $1.23. However, revenue of $16.9 million missed estimates for $22.9 million.

The company announced the layoff of 85% of its workforce from 410 workers to only 60. As part of the restructuring the company is divesting its infectious disease business by the end of 2017. The revenue from the divestiture should allow the company to "aggressively" move its drug candidate through late stage clinical development. The drug, inclisiran is part of a new class of cholesterol lowering therapies called PCSK9 inhibitors. The phase three trial started the first week of November. MDCO is partnering with Alnylam (ALNY) on the trial. There are 1,500 in the trial at 100 clinical sites in eight countries. This is only one of four concurrent trials covering nearly 3,500 patients. The initial trials were very positive.

The stock declined to $28 on the dramatic layoffs and traded sideways for two weeks. A rebound has begun and options are cheap.

Update 11/9: Cardiologist Milton Packer is already pounding the table on MDCO's PCSK9 drug and it is still a couple years away from sales. He said it has the potential to be better than Amgen's Repatha and only needs to be dosed twice a year rather than twice monthly. He said it will also be significantly cheaper than the $14,000 a year for Repatha.

Position 11/9/17:

Long Jan $32 call @ $2.00, see portfolio graphic for stop loss.


MU - Micron Technology - Company Profile

Comments:

No specific news. Only a minor 44 cent decline from the new high.

Original Trade Description: November 11th

Micron Technology, Inc. provides semiconductor systems worldwide. The company operates through four segments: Compute and Networking Business Unit, Storage Business Unit, Mobile Business Unit, and Embedded Business Unit. It offers DDR3 and DDR4 DRAM products for computers, servers, networking devices, communications equipment, consumer electronics, automotive, and industrial applications; mobile low-power DRAM products for smartphones, tablets, automotive, laptop computers, and other mobile consumer device applications; DDR2 and DDR DRAM, GDDR5 and GDDR5X DRAM, SDRAM, and RLDRAM products for networking devices, servers, consumer electronics, communications equipment, computer peripherals, automotive and industrial applications, and computer memory upgrades; and hybrid memory cube semiconductor memory devices for use in networking and computing applications. The company also provides NAND Flash products, which are electrically re-writeable, non-volatile semiconductor memory devices; client solid-state drives (SSDs) for notebooks, desktops, workstations, and other consumer applications; enterprise SSDs for server and storage applications; managed multi-chip package products; digital media products, including flash memory cards and JumpDrive products under the Lexar brand name. In addition, it manufactures products that are sold under other brand names; and resells flash memory products that are purchased from other NAND Flash suppliers. Further, the company provides 3D XPoint memory products; and NOR Flash, which are electrically re-writeable and semiconductor memory devices for automotive, industrial, connected home, and consumer applications. Company description from FinViz.com.

Micron is on a roll. Some analysts are targeting $50 by the end of December despite the monster gain so far in 2017. Memory is in short supply and prices are rising monthly. The rapid escalation of cloud technology is demanding hundreds of thousands of servers per quarter, millions of disk drives and untold numbers of PCs, phones, tablets and IoT devices.

For Q3, they reported earnings of $2.02 compared to estimates for $1.84. Revenue rose 90% to $6.14 billion and analysts were expecting $5.97 billion.

For the current quarter, they guided for earnings of $2.09-$2.23 on revenue of $6.10-$6.50 billion. Analysts were expecting $2.14 in earnings.

Despite the strong earnings and forecasts, the company trades at a PE of 9.5 when the S&P is trading at 18.2. This is a monumental mismatch and suggests investors will be racing to buy this undervalued stock.

Shares spiked on earnings and ran up to $40.50. On Oct 31st, they spiked again to $45 after Toshiba said DRAM and NAND memory would remain in high demand and tight supply through 2018.

On October 10th, they announced a $1 billion secondary offering and shares dipped for several days while the offering was priced and completed. This added 25 million shares to the float with 1.14 billion shares outstanding.

This was a great deal. They are using the proceeds to help fund the retirement of $2.25 billion in debt priced at 7.5% and 5.5% interest. This will reduce their costs and eliminate those debt service payments. They raised about $1.2 billion after the offering was upsized and the rest of the funds for debt retirement will come out of cash on hand.

Summit Redstone said buy because the secondary offering to pay off debt was an exercise in value creation. The analyst has a $51 price target. Credit Suisse reiterated an outperform rating and $50 target. Susquehanna has a $50 target and Evercore ISI has a $50 target. Barclay's boosted their target price from $40 to $60 saying DRAM demand looks good through 2018. Demand should remain high and supply should remain tight. Stifel has a $60 target. Needham's, Rajvinda Gill has a price target of $76.

UBS analyst Stephen Chin says he expects Micron's profits to rise 50% in 2018 to $7.50 per share. If you put any kind of market multiple on those earnings, the stock should double.

Shares drifted lower from the Halloween spike but rebounded on Friday back to the highs. There are no sellers in Micron.

Update 11/13: Micron announced a new 32gb NVDIMM memory that is twice as large as current chips on the market. This is non volatile DIMM that retains data in memory next to the processor to speed up processing of large datasets. Shares closed at a new high.

Position 11/13:

Long Jan $46 call @ $2.95, see portfolio graphic for stop loss.


PYPL - PayPal - Company Profile

Comments:

No specific news. Weak market casualty with a decent decline.

Original Trade Description: October 25th.

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.

They reported Q3 earnings of 46 cents, up 32%, that beat estimates for 44 cents. Revenue of $3.24 billion, up 21% and beat estimates for $3.17 billion. They guided for the current quarter for earnings of 50-52 cents and full year earnings of $1.86-$1.88. Mobile payment volume rose 54% to about $40 billion. Total payments rose 31% to $114 billion. Free cash flow rose 36% to $841 million and they have $7.1 billion in cash. They added 8.2 million active accounts with net new actives up 88%. They now have 218 million active customer accounts with 17 million merchants. They processed 1.9 billion payments, up 26%.

Q4 revenue is expected to rise 20-22% to $3.570-$3.630 billion. Paypal said payment platform Venmo was on track with expectations. The platform processed $9.1 billion in payment volume, a 93% YoY increase.

Expected earnings January 18th.

The company recently announced partnership deals with Baidu, Bank of America, Visa, JP Morgan, Facebook and Apple. They have changed their focus from disruptor to partner where they can process more transactions through the partners. The Baidu partnership will connect them to 700 million Chinese shoppers and 17 million Paypal merchants. The deal with Apple to allow Paypal in the iTunes store, AppStore and Apple Music will connect them to more than 1 billion IOS devices worldwide. The Facebook partnership gives them access to 2.01 billion users.

Pacific Crest Securities said their market cap of $85 billion does not make them too big to be acquired by a larger bank. Even Amazon has been mentioned as a possible acquirer.

In mid August Paypal said it was acquiring Swift Financial, a small business lender and the transaction would close by the end of 2017. No terms were given. This will extend Paypal's reach for financing services. Paypal already has a working capital unit since 2013 and they have loaned more than $3 billion to small businesses.

Thanks to recent agreements with MC/V, users will be able to transfer money directly from their accounts to credit/debit cards, which will become a big selling point. The new "Pay with Venmo" platform that will allow users to make purchases at retail locations is in test mode with Lululemon, Athletica and Forever 21 already accepting those payments. This is turning into another big revenue stream for Paypal.

PayPal just launched domestic payment services in India with 1.324 billion people.

Shares posted an 81% gain on Wednesday when the market was down on much needed profit taking. Investors looking for a buying opportunity are going to be left behind.

Position 10/26/17:

Long Jan $72.50 call @ $2.95, see portfolio graphic for stop loss


STX - Seagate Technology - Company Profile

Comments:

No specific news. Decent gain in a weak market.

Original Trade Description: November 6th

Seagate Technology plc provides data storage technology and solutions in Singapore, the United States, the Netherlands, and internationally. The company manufactures and distributes hard disk drives, solid state drives and their related controllers, solid state hybrid drives, and storage subsystems. Its products are used in enterprise servers and storage systems applications; client compute applications, primarily for desktop and mobile computing; and client non-compute applications, including various end user devices, such as portable external storage systems, surveillance systems, network-attached storage, digital video recorders, and gaming consoles. The company offers external backup storage solutions under the Backup Plus and Expansion product lines, as well as under the Maxtor and LaCie brand names available in capacities up to 120 terabytes. It sells its products primarily to original equipment manufacturers, distributors, and retailers. Company description from FinViz.com.

Earnings January 22nd.

Seagate posted earnings of 96 cents that beat estimates for 86 cents. Revenue of $2.63 billion beat estimates for $2.53 billion despite a 6% decline. The declared a quarterly dividend of 63 cents payable January 3rd to holders on Dec 20th. During the quarter they returned $350 million to shareholders through dividends and stock repurchases. Cash on hand was $2.3 billion.

The company said demand was increasing as the move to cloud storage was creating the need for massive amounts of data bandwidth, storage, manipulation and retrieval. The average storage per drive shipped was 1.7 terabytes with the average selling price $64 per drive. Hard drive storage is a commodity business where existing technology is competing on a byte per dollar basis and new technology is the only way to expand ASPs. Seagate is progressing in that battle with larger and larger drives that operate at faster speeds and last longer between failures. With many businesses moving to SSD storage, Western Digital has the lead there because of its partnership with Toshiba. However, Seagate just signed on to the consortium that is buying the other half of the Toshiba memory business that WDC does not own. This will enable Seagate to acquire memory for the lowest prices possible and compete with WDC in the SSD arena.

Seagate just announced AI powered hard drives for video monitoring.

Seagate shares spiked from $35 to $40 on the earnings. They declined back to $36 where they found support and it appears a rebound has begun. Shares were already trending higher before the earnings and this could be an extension of that trend.

Position 11/7/17:

Long Jan $39 call @ $1.14, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile

Comments:

The morning drop in the Dow hit 232.65 in the DIA and only 40 cents away from our exit target. We could still get lucky with 2 days to go and the market showing cracks around the edges. The option doubled to 54 cents today. With the Dow closing near the lows, I think we should sell at the open on Thursday. With only one day left until expiration we are not going to get another chance. Just keep your fingers crossed for another gap lower.

Original Trade Description: October 21st.

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 DJIA is the oldest continuous barometer of the U.S. stock market, and the most widely quoted indicator of U.S. stock market activity.

I am going to make this as simple as possible. The Dow is extremely overbought. It is due for a rest. There are 12 Dow components reporting earnings this week. Volatility will occur but we do not know in which direction. Since all the Dow gainers are already up strongly over the last several weeks, there is a good chance we could see some declines.

This is highly speculative. I am using November options because they are cheap but they will require a substantial move in the next ten days or they will decay quickly. This will be a quick trade.

Buy Nov $232 put, currently $1.86, no initial stop loss.




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