Option Investor

Daily Newsletter, Wednesday, 12/6/2017

Table of Contents

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

Market Wrap

Seasonal Pullback

by Keene Little

Click here to email Keene Little
A seasonal pattern for December is weakness in the first half of the month and then the Santa Claus rally in the second half. This has been a year of not following seasonal patterns (sell in May, weakness into September?) but so far December has started off on the weak side. The pullback so far can be considered just a correction to the rally but it's still a question as to whether or not the seasonal pattern will hold true this month.

Today's Market Stats

Today was another mixed day with different indexes doing different things. Today the techs were stronger while the Dow and RUT (which have been strange bedfellows lately) were the weaker indexes. SPX finished flat. It's been like this since the end of November and the mixed messages from the indexes is one part of the equation that says we probably are getting just a correction to the rally, one which will be followed by another leg up, possibly as early as next week (opex).

Countering the argument for a correction this week and then another rally leg is the bear's argument that this is exactly what we should expect to see at a major top. The market gets goofy as money rotates in and out of different sectors and tops are made at different times by the different indexes. Tops in the stock market are generally messy affairs (vs. v-bottom reversals), which generally creates rounded topping patterns. We'll only know in hindsight and until the price patterns prove otherwise I think it's safer to look for higher prices.

We might not see the market make it much higher and it could do so in a very choppy (ending) pattern. We have enough warning signs from technical indicators to suggest caution to the point where new long positions are probably not worth the risk. Bottom line, I'd say both sides need to be cautious here since the upside potential does not offer a good risk:reward ratio (look for profit potential at least 3 times the risk before risking your capital).

It was a relatively quiet day with weak but bearish market internals. The day started with a small bounce attempt but ended up going more sideways than anything else. Short term it's looking like we could get another leg down but again, if we're into a correction to the rally we should not see last Friday's lows broken. So for the short term, mind the chop.

There's been a lot of discussion about how long this bull market has lasted and how strong it's been. The chart below is through November 30th and shows the S&P 500 has gone 391 days without a 3% pullback, which means today makes it 395 days and still counting. This is the longest stretch since the post-WWII period and possibly longer than that. Kudos to the bulls -- that's quite a performance.

We know there are a few reasons behind such a long stretch of time without a decent pullback in the market, the largest being simply the extra liquidity from central banks. Liquidity, in the form of newly created fiat dollars (or euros, yen, etc.), goes looking for a home and yield chasing has benefitted the stock market and other higher-yielding assets such as real estate. Cryptocurrencies are certainly the beneficiaries as well (Bitcoin shot higher today and is now above $14K), although the crypto market hasn't been penetrated much by institutional money, yet. Additional liquidity has also come from cheaply borrowed dollars, much of which has made it into the stock market (corporate buybacks).

What's troubling, and has been for a long time and therefore not a good market timing issue, is the fact that the economy has not been doing well. Most everyone talks about how strong the economy is and the fact that it's been growing steadily, but it has not been strong and it has not supported the extremely high valuations for the stock market.

The economic recovery from 2009 has lasted a long time but it's been weaker than all previous recoveries in the past 6 decades, as can be seen in the chart below. The current recovery is the yellow line at the bottom of the chart -- it is now as long as the 1982-1990 recovery but still short of the 1961-1969 and 1991-2000 recoveries. But importantly it's been much weaker than all previous recoveries.

U.S Economic Expansions since 1961

The two charts above tell me the current stock market is seriously out of synch with reality, which is most often the case at stock market tops. Where the top will be to the current bull market is anyone's guess but I think it's very important to recognize the "adjustment" that's going to be made when it happens.

The previous economic recoveries were based on real production increases and real improvements in GDP (along with the "it's different this time" dot.com boom). We have neither this time and the strong bull market has been primarily driven by money created out of thin air and corporate buybacks. People have been borrowing heavily to spend and the amount of credit (debt) is at all-time highs. The debt implosion, as always happens, will significantly hurt the stock market.

Today, with the Fed on a tightening cycle and corporations slowing their buybacks, the props holding up the market are being dismantled. Without these props it's only a matter of time before the market runs into trouble and I believe the trouble could be quite painful for those who simply hold on through the "pullback," believing it will always come back.

The recovery from the next bear market could take decades, like that following the 1929 crash -- the losses were not recovered until nearly 30 years later, about 1956 in inflation-adjusted dollars. And that's just the recovery. Think about how much better you'll do if you protect your profits and buy back in at a much lower price. And if you play the short side in the next bear market you'll have an opportunity to make bitcoin-like profits (wink).

BTW, speaking of Bitcoin and getting off on a small tangent, since so many more people are talking about Bitcoin, I thought I'd share my quick take on it before diving into the stock charts. Bitcoin's rally has gone parabolic, which is why so many are calling it a bubble that's ready to pop at any time. Of course they've been saying that each time it has spiked higher since 2015 (when it traded between about $200 and $500, how quaint).

Bitcoin, Daily chart, 2015-present

The Bitcoin chart below is a squished daily chart to show the climb from the beginning of 2015 (I told myself back then I'd be a buyer if it dropped down to a Fib pullback level at $150 in January 2015, which it did and of course I didn't -- doh!). The uptrend lines since 2015 have been increasing in pitch, which is the definition of a parabolic move (my chart is using the log price scale, making the parabolic move all the more amazing).

I have two parabolic lines, one off the lows and the other off the highs, and both are coming together near $15K this month. Bitcoin could certainly break higher into a truly massive parabolic move, which it's starting to do (the top parabolic line is near $12K), or it's doing a little throw-over and will come crashing back down. I'm watching to see if it will get further pinched into the crossing lines later this month.

A drop below the lower parabolic line, currently near $8K, would be a bearish development. It's hard to see in my squished chart (tradingview.com is the charting software, which is excellent for charting the cryptos, as well as stocks) but each previous peak before a strong pullback has acted as price-level support. The last peak was near 7600 in the beginning of November. A drop below that level would be a confirmed break of the lower parabolic line, which would confirm a more important high is place for now.

I'm one of the believers in cryptos and fully support a way around central-bank-controlled fiat currencies. I believe BTC and others will head much higher over the coming decade but buying right here is asking for trouble. Don't let FOMO catch you here. And especially don't get caught up in the huge number of ICOs (Initial Coin Offerings), most of which are pump-and-dump schemes.

And now on to our regularly scheduled program, starting with the Dow's weekly chart

Dow Industrials, INDU, Weekly chart

Last week the Dow made it up to the trend lines along the highs from April 2016 - March 2017 and from 2011-2014, which are currently near 24310 and 24120, respectively. Monday spiked above both lines and the pullback from Monday is down near the longer-term trend line along the highs from 2011-2014. This lower line near 24140 should act as support if we're going to see another run higher, whereas it would start to look a little more bearish if the Dow drops below 24100. A rally above Monday's high at 24534 would obviously be bullish but the pattern suggests we might get just a minor new high to put in a more significant top.

Dow Industrials, INDU, Daily chart

The Dow's daily chart doesn't have the 2011-2014 trend line shown on the weekly chart above but it shows the one along the highs from April 2016 - March 2017 and a shorter-term one along the highs from April-October 2017. The Dow spiked above both trend lines and has now pulled back to the shorter-term one, currently near 24120. So between the longer-term trend line from 2011-2014 and the shorter-term one from April-October we have trendline support at roughly 24120-24140 and today's low was 24134. Last Friday's low was at 23921 and that's a must-hold price for the bulls.

Key Levels for DOW:
- stay bullish above 23,921
- bearish below 23,250

S&P 500, SPX, Daily chart

Last Thursday and again on Monday morning SPX spiked up to a trend line along the highs of the rally from August, each time getting rejected from there. The daily oscillator is overbought and the hourly oscillators show bearish divergence on Monday vs. last Thursday's high, both of which suggest we might have topped on Monday. But we'll see if support holds at the trend line along the highs from June-November 2017, which is where SPX closed today (2629). I'm showing the bullish potential to rally up to about 2680-2690 by next week and I'll stick with that expectation until price proves the bears have gained control, which would start with a break down below last Friday's low at 2605. That's also where the 20-dma is now located, making it doubly important for the bulls to defend.

Key Levels for SPX:
- bullish above 2665
- bearish below 2605

S&P 500, SPX, 60-min chart

Following last Thursday's high I thought we'd see at least a larger pullback correction before heading higher. Then we got Monday's higher high and it was looking like it might continue its rally. Instead I think the minor new high is part of a correction to the rally, which I'm showing as a sideways triangle that will resolve to the upside, possibly as early Friday after another small up-down sequence. It could of course just start heading back up from here but I consider that a lower probability.

Because the pullback from Monday can be viewed as an impulsive decline, meaning Monday could have been an important high, a bounce Thursday morning is a shorting opportunity but only if managed tightly. Shorting the market here is still an attempt to catch rising knives. But if an important high is in place then the next leg down should be strong and I would expect to see SPX drop down to at least its uptrend line form August-October, near 2595. If however we see a small drop lower Thursday morning and then a stronger bounce I'd be more inclined to believe the bullish sideways triangle will play out, which calls for another rally into next week.

Nasdaq Composite index, COMPQ, Daily chart

The techs have been weaker than the broader market, and the RUT, since they peaked on November 28th. But the pullback has been very choppy and that has it looking like just a correction to its rally. It would look more bearish below its uptrend line from September-October and its 50-dma, both near 6691, but until then it's looking like a good short-term setup to get long (with a stop below 6680). Upside potential is to 7006, where the 5th wave of the rally from August would equal the 1st wave, and potentially up to about 7080 if it makes it up to the trend line along the highs of its rally since October and the top of a parallel up-channel for the rally from August.

Key Levels for COMPQ:
- more bullish above 6915
- bearish below 6680

Monthly Performance for Small Caps

The RUT has been one of the weaker indexes since Monday and it's now testing support so we'll see if the typically strong December starts to exert its influence. The chart below shows the typical performance for small caps and as you can see on the chart, December is the strongest month with a 78% chance of finishing the month higher. The next two best months, at 74% are March and November. March finished marginally lower but November was a very strong month for the RUT. We now wait to see if the bulls will climb back in and lift the RUT 1544, which is where November closed and it's also the all-time closing high.

Russell-2000, RUT, Daily chart

Today the RUT closed down and on support at the top of its previous October-November expanding triangle. I've had that level (1509) as a key level for the bears to break but now with the 20- and 50-dma's coming up, currently near 1504-1506, I think the key level to break is 1503. Keep in mind that the Thursday prior to opex is considered "head-fake" day, usually with a morning decline to suck in the shorts and then spit them out with a short-covering rally and stronger buying into opex.

If the bears press their attack here and drive the RUT below last Friday's low near 1498 I think we'll be hearing the fat lady singing. There's a weekly price projection at 1562, which is where the 5th wave of the rally from February 2016 equals the 1st wave. Monday's high was near 1560 so was that close enough for government work? That's a distinct possibility and the reason an impulsive decline below 1503 would be bearish. Shorting a subsequent bounce to a lower high would then be the recommended trade.

Key Levels for RUT:
- bullish above 1560
- bearish below 1503

KBW Bank index, BKX, Weekly chart

The banks had a strong rally off the November 27th lows and last week BKX made it up to the trend line along the highs from April 2010- March 2017, currently near 106. On Monday, with the spike up to a new high, it poked above the trend line and then pulled back to it on Tuesday. Today it formed a little doji slightly below the line and for the week so far we have a shooting star at the trend line.

With daily oscillators in overbought and weekly oscillators showing bearish divergence I don't think it's a safe bet on the upside. If this week finishes as a doji/shooting star at resistance I'll make a bet that next week will be a red candle and that would complete a 3-candle reversal pattern to confirm completion of a small rising wedge pattern for the final 5th wave of its rally from February 2016. Follow the money if BKX starts back down ahead of the pack.

U.S. Dollar contract, DX, Daily chart

Until today I've been leaning long the US$ following the successful back-test of the top of its broken down-channel from January (last week). But I think it's a coin toss from here and we'll need to wait for either a break above 94 or a drop below 92.50 to have a better idea which direction it will head from here.

Today it achieved a price projection at 93.58 (with a high at 93.62) for two equal legs up from November 27th. At the same level it has run into its broken 20- and 50-dmas, now near 93.50 and 93.65, respectively. The confluence of these resistance levels could mean tough going for the bulls and a turn back down after an a-b-c bounce off the November 27th low could lead to another leg down, one which would target the $90 area. But a rally above 94 would have it looking stronger and potentially much stronger if it's into a 3rd wave in the rally from September. We'll need to let price lead the way from here.

Gold continuous contract, GC, Daily chart

Bitcoin is being talked about as a replacement for gold since it's easier to spend bitcoin than gold (unless of course an EMP takes down the electric grid). Bitcoin mania has probably depressed interest in gold for now and that could continue until there's a panic out of Bitcoin (which is likely coming soon). But I don't think that's the primary driver behind gold's funk that it's been in since the September high. I think the longer-term pattern is still in a bearish downswing and lower prices ahead. That might change if and when the stock market gets taken out behind the woodshed but even at that point it might be a time where all asset classes are sold.

Gold is currently sitting on price-level support near 1265, which goes back to 2010 but more recently from the February 2017 high. The bottom of a descending triangle (descending highs, flat bottom) since the October 6th low at 1262.80 should hold if we're to get one more bounce up in the triangle pattern. Following one more bounce would then be a good setup for the next leg down for gold. Only a break above 1300 would I turn bullish gold. Silver has already broken below its October 6th low and gold could follow sooner rather than later.

Oil continuous contract, CL, Daily chart

Once oil hit 59 on November 24th I thought it was a good setup for a reversal back down. The EW pattern could be considered complete there and it had achieved a 38% retracement of its 2013-2016 decline. There is additional upside potential to the top of its up-channel from June and a trend line along the highs from June 2016 - January 2017, currently near 62, especially if we get a strong bounce off the uptrend line from August, which is about to be tested at 55.50. I think the bigger pattern points back down but until oil drops below 54.80 I'm watching for evidence for another rally.

Economic reports

Thursday's economic reports include the unemployment claims data and the Challenger Job Cuts in the morning (no big changes expected) and then Consumer Credit in the afternoon. There should be nothing market moving from the reports. Friday we'll get the NFP reports, which are expected to show slowing in new jobs but if it comes in around 200K it would likely keep the Fed on its rate-increase track.


The market looks in danger of tipping over, especially since the decline from Monday is looking impulsive enough to suggest we should short the next bounce correction to a lower high. But I'm staying cautious about this market, especially since there's the potential for a whippy consolidation this week and into next that sets up what I believe would be the final leg of the rally. That would also fit the December seasonal pattern.

For the bullish pattern to hold I think it's important for last Friday's lows to hold (except for the tech indexes, which have a different pattern). A drop below those lows would more strongly suggest important highs are already in place, in which case it would be time to look at bounce corrections as shorting opportunities.

I can only go by what the charts are telling me but looking ahead this month, if the market starts to get worried that the tax reform plan will get hung up in committee, on top of the debt ceiling worries, we could see a lot more selling kick in. If the tax plan is looking like it's in trouble, profit taking could happen this month rather than waiting for January's expected lower tax rates.

Countering all these worries is of course the expected Santa Claus rally. But will that rally start from much lower? All of these things can only be guessed and right now I'll stick with the charts, as messy as they are. As long as next Friday's lows hold I think it's safer on the long side even though I hate using the word "safe." This is a tricky spot and flat is a very good position.

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



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New Option Plays

Double Dipping

by Jim Brown

Click here to email Jim Brown

Editors Note:

We are doubling up on this beaten down sector. We already have the semiconductor ETF but I am adding Applied Materials as well.


AMAT - Applied Materials - Company Profile

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

Expected earnings Feb 15th.

Wells Fargo initiated coverage on AMAT today with an outperform rating and $65 price target. Chips run the world and with new and faster chip types being announced almost monthly, the chip makers have to continually buy new manufacturing equipment from Applied Materials.

AMAT reported Q3 earnings of 93 cents on revenue of $3.97 billion. Analysts were expecting 91 cents and $3.94 billion. The company guided for the current quarter for earnings of $.94-$1.02 on revenue of $4.0-$4.2 billion.

Flash memory equipment sales surged 38%. Semiconductor revenue rose 14.2%. Sales of equipment to make display screens for phones and TVs rose 50%. Their order backlog rose 32% to $6.03 billion. The CEO said AMAT will see strong double digit growth in 2018 for all their lines of business.

"This is the most exciting time in the history of the electronics industry," said Dickerson. "AI will transform entire industries over the coming years, creating trillions of dollars of economic value, and Applied is uniquely positioned to deliver the innovative materials needed to enable next-generation memory and high-performance computing."

Shares had declined to $50 in the chipwreck over the last week. This is the 100-day average, which has been support since early 2016.

Buy Feb $52.50 call, currently $2.69, initial stop loss $44.85.


No New Bearish Plays

In Play Updates and Reviews

Passing Time

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes traded sideways as investors wait for news on the tax bill. With multiple items in the current tax bill that would be negative for investors, they are waiting to see if any are removed in the conference committee. There are three things that if passed would cause significant selling in 2017. If those are removed, then the rally can continue. It could be a week before we know the outcome and I would not expect a big rally until we do.

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

DXCM - Dexcom Inc - Company Profile


No specific news. Holding the gains.

DXCM will present an update on the company to be presented at 11:AM ET on Dec 14th at the BMO healthcare conference.

Original Trade Description: November 25th

DexCom, Inc., a medical device company, together with its subsidiaries, focuses on the design, development, and commercialization of continuous glucose monitoring (CGM) systems in the United States and internationally. The company offers its systems for ambulatory use by people with diabetes; and for use by healthcare providers in the hospital for the treatment of patients with and without diabetes. Its products include DexCom G4 PLATINUM system for continuous use by adults with diabetes; DexCom G4 PLATINUM with Share, a remote monitoring system; and DexCom G5 Mobile, a CGM system that directly communicates to a patient's mobile and its data can be integrated with DexCom CLARITY, which is a next generation cloud-based reporting software for personalized, easy-to-understand analysis of trends to improve diabetes management. The company also offers sensor augmented insulin pumps. It has a collaboration and license agreement with Verily Life Sciences LLC to develop a series of next-generation CGM products. The company markets its products directly to endocrinologists, physicians, and diabetes educators. Company description from FinViz.com.

DSCM was slammed for a $22 loss at the open on Sept 28th on news that Abbott Labs had made a glucose monitoring system that did not require the daily pinprick to draw a drop of blood. Shares fell from $67.50 to $44.50 and stayed there for a month. Investors feared diabetics would drop the DexCom monitoring products in a heartbeat and move to Abbott's system.

On November 1st, the company posted better than expected earnings and revenue and the stock began to rise again.

Expected earnings January 31st.

The DexCom CEO gave an interview on CNBC last week and he said the Abbott system will not have a dramatic impact to DexCom sales. He pointed out that they had been competing against the Abbott Libre system in Europe for three years and growth has continued to rise. It wa sup 80% in Q3 alone.

The CEO said the DexCom system does much more than the Abbott system. "Our system connects to phones. We share data with people who watch patients. We offer performance and accuracy that others do not. He said DexCom could release its own blood-free glucose monitoring device by the end of 2018. DexCom is also in a venture with Apple to monitor glucose through the Apple Watch. The data will go straight to the cloud for monitoring and there will be no need to communicate through a daily phone call. The watch will become your monitoring device.

The $20 drop was serious overkill and the stock is rebounding now that investors understand there is no immediate impact and there are new devices on the horizon.

We have to reach out to the March strikes because the February series has not yet been added. With earnings January 31st we need to hold an option dated after the earnings to avoid the rapid decline in premium in pre-dated options.

Position 11/27/17:

Long Mar $60 call @ $3.30, see portfolio graphic for stop loss.

GILD - Gilead Sciences - Company Profile


Gilead is launching a new HIV drug in February named bictegravir. Sales of this drug are expected to rise 50% annually to peak at $4 billion in 2023. This will replace some of the market share loss from older HIV drugs that have lost their protected status.

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.

Update 11/30/17: Maxim Group upgraded Gilead from hold to buy with a $94 price target. Gilead closed at $75 giving it plenty of room to run.

Position 11/8/17:

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

MCK - McKesson - Company Profile


No specific news. Shares retraced another 22 cents of the nearly $7 gain on Monday.

Original Trade Description: November 15th

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.

Position 11/16:

Long Feb $145 call @ $4.90, see portfolio graphic for stop loss.
OPTIONAL: Short Feb $160 call @ $1.59, see portfolio graphic for stop loss.

PYPL - PayPal - Company Profile


No specific news. Shares holding at support at $70.

Original Trade Description: November 29th

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.

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.

Paypal signed a deal to sell $5.8 billion in its credit card portfolio to Synchrony Financial. The company said that would free up cash for acquisitions and expansion. The company raised its revenue forecast to $3.64-$3.70 billion for the current quarter. They raised earnings guidance from 37-39 cents to 52-59 cents.

Paypal closed exactly on horizontal support and the 30-day average, which has been support since February. The company is more of a bank than a tech stocks and should benefit from any further rotation into banks.

The original PYPL position was stopped out in the Nasdaq crash on Nov 29th and we rentered this new position on Nov 30th.

Update 12/2: Keybanc believes the Venmo payment app is going to be a breakout hit in 2018 and raised his price target for Paypal from $85 to $90. In a recent survey of 500 consumers, Venmo was the preferred payment option for 76% of respondents. Paypal is forecasting $75 billion in Venmo payments in 2018 and they get an estimated 4 cent EPS boost for every $10 billion.

Position 11/30/17:

Long Feb $75 call @ $3.75, see portfolio graphic for stop loss.

SMH - Semiconductor ETF - ETF Profile


Nasdaq fighting back but still struggling. Chips slightly positive today.

Original Trade Description: December 2nd.

VanEck Vectors Semiconductor ETF (SMH) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS US Listed Semiconductor 25 Index (MVSMHTR), which is intended to track the overall performance of companies involved in semiconductor production and equipment. The index seeks to track the most liquid companies in the industry based on market capitalization and trading volume. Industry Leaders: Index methodology favors the largest companies in the industry. Global Scope: Portfolio may include both domestic and U.S. listed foreign companies allowing for enhanced industry representation.

The semiconductor sector leads the Nasdaq because chips affect every tech product and service. The semiconductor sector was down -8% at the low on Friday in only four days. The decline stopped at the 50-day average, which has been support several times over the last year.

If the Nasdaq is going to move higher the chip sector will lead it.

Position 12/4/17:

Long Feb $100 call @ $3.50, see portfolio graphic for stop loss.
Short Feb $105 call @ $1.30, see portfolio graphic for stop loss.
Net debit $2.20.

TRN - Trinity Industries - Company Profile


No specific news. Minor retracement in a weak market.

Original Trade Description: December 4th.

Trinity Industries, Inc. provides various products and services to the energy, chemical, agriculture, transportation, and construction sectors in the United States and internationally. Its Rail Group segment offers railcars, including autorack, box, covered hopper, gondola, intermodal, tank, and open hopper cars; and tank cars, as well as railcar maintenance services. This segment serves railroads, leasing companies, and industrial shippers of various products. The company's Railcar Leasing and Management Services Group segment leases tank and freight railcars to industrial shippers and railroads; and provides management, maintenance, and administrative services. As of December 31, 2016, this segment had a fleet of 85,110 owned or leased railcars. Its Construction Products Group segment offers highway products, such as guardrail, crash cushions, and other barriers; aggregates, including expanded shale and clay, crushed stone, sand and gravel, asphalt rock, and other products, as well as other steel products for infrastructure-related projects; and trench shields and shoring products for the construction industry. This segment offers aggregates to concrete producers; commercial, residential, and highway contractors; manufacturers of masonry products; and state and local municipalities. The company's Energy Equipment Group segment manufactures structural wind towers; utility steel structures for electricity transmission and distribution; storage and distribution containers; cryogenic tanks; and tank heads for pressure and non-pressure vessels. Its Inland Barge Group segment provides deck barges, and open or covered hopper barges to transport grain, coal, and aggregates; and tank barges to transport chemicals and various petroleum products, as well as fiberglass reinforced lift covers for grain barges. Trinity Industries, Inc. was founded in 1933 and is headquartered in Dallas, Texas. Company description from FinViz.com.

More than 11,500 January $35 calls traded on Monday against an open interest of only 325. The excitement was generated by activist shareholder ValueAct Holdings, which has acquired 1.3 million shares since October and now owns 18.595 million and more than 12% of the company. Their last purchase was 43,000 shares on November 16th.

In October, the courts reversed a $663 million judgment against Trinity. The claim was for fraud after the company changed its formula for the steel in highway guardrails in 2005 and did not tell the Federal highway system. Billions of dollars of these rails have been installed around the country and after extensive testing the government found nothing wrong but complained anyway. A Texas court in 2015 awarded the judgment and Trinity appealed. The appeals court wrote a 42-page opinion tossing the case and reversing the judgment.

Earnings estimates for Trinity for Q4 have risen 31 cents to 42 cents per share over the last two months. That is a 300% rise. For the full year estimates have risen from $1.25 to $1.44.

Earnings January 24th.

Shares closed at a new 52-week high on Monday and appear destined to make higher highs. That massive amount of option volume at the money at $1.25-$1.50 per share represents $1.6 million in premium at an average of $1.40 per share. I am recommending we follow this trade only buy a higher strike.

Position 12/5/17:

Long Jan $37 call @ $1.20, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile


The negative tax news continues to weigh on the Dow but there is a lot of month left in December.

Original Trade Description: November 16th

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 still extremely overbought. It is due for a rest. The earnings cycle is over. Post earnings depression is here. The short squeeze is likely to fail. The tax plan faces an uphill battle and January could see a major market decline. It has been over 500 days since the market had a 5% decline and we average twice a year. We are due.

This is highly speculative. I am using March options because I want to have as much time as possible for this scenario to play out.

Position 11/17/17:

Long March $230 put @ $5.16, see portfolio graphic for stop loss.
Short March $210 put @ $1.71, see portfolio graphic for stop loss.
Net debit $3.45.

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