Option Investor

Daily Newsletter, Wednesday, 1/3/2018

Table of Contents

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

Market Wrap

Santa Arrived

by Keene Little

Click here to email Keene Little
He might have been late, due to fighting off the bears attacking his reindeer, but Santa arrived for the final two days of the period when we typically get the Santa Claus rally. January has started off on a bullish hoof and that bodes well for the rest of the month and year (maybe).

Today's Market Stats

The late-day selling last Friday was followed by a big gap up Tuesday morning, thanks again to the overnight rally in the futures, and that left more than a few bears trapped at Friday's lows. With another overnight rally in the futures we started the day with another gap up and the bulls kept the rally going. Some initial upside targets have now been met so it's going to be important what follows the conclusion to the Santa Claus rally period.

There wasn't much in the way of economic reports today to influence the market or to change the bullish intention. This morning we got the ISM Index and Construction Spending, both of which came in slightly better than expected but nothing extraordinary. ISM for December was 59.7, an improvement from 58.2 in November and better than the expectations for 58.0. Construction Spending for November was +0.8%, which was a small drop from the +0.9% in October but better than the +0.7% that had been expected.

Auto and truck sales were in line with expectations and changed little in December. There was also no response to the FOMC minutes that were released this afternoon. If anything, there was some concern over the lack of agreement about how many rate hikes there should be this year but that had no effect on the market. The market did rally a little more following the report since it was one less thing to worry about.

For a long time we've seen volatility bleed out of this market and it's one of the measures of complacency that's been both bullish as well as worrisome. It's bullish of course because it says investors are not worried about significant market corrections and therefore they feel comfortable putting more money to work in the market. We can also see this in investor surveys (which are actually now getting too bullish from a contrarian perspective). Since the big spike in the VIX back in August 2016 we've seen it work its way lower over time as the spikes created lower highs and the lows dropped marginally lower each time before spiking back up.

The pattern that the VIX has created is a large bullish descending wedge, as seen on its weekly chart below. The bottom of the wedge is currently at 8.27, which if reached would have it dropping below is December 2006 spike low and which was tested with the spike low this past November 24th. It will be interesting to see if the VIX will in fact drop to a new all-time low with a rally to more new all-time highs for the stock indexes.

The worrisome thing for bulls with what we see with the VIX chart is the bullish interpretation of the pattern. It's a bullish pattern with confirming bullish divergence at the new lows over the past two years. A bullish VIX is of course bearish for the stock market and the only question is when this bullish pattern will see a bullish breakout, starting with a rally above its 200-week MA and the top of the descending wedge, at 14.28 and 13.92, respectively. A close above 14.28 would be strong confirmation that a bottom is in for the VIX and a top for the stock market.

Volatility index, VIX, Weekly chart

The very low VIX is a result of a steady rise in the stock market with little to no retracements along the way. Every month of 2017 finished positive, a first, and the market has now gone 428 days with a correction of 3% of more. For SPX a 3% correction would be about 80 points, or a drop to about 2630 from the current level. That would only be back to about where SPX was trading in early December. With so few corrections since November 2016 and the nearly straight-up ride since the small pullback last August, it's no wonder investors are feeling fearless.

The absolute daily percentage change for SPX in 2017 was just 0.3%, which makes it the tightest range since 1964 (53 years). Along with the continuing stream of new all-time highs for the indexes, the VIX closed lower 47 times last year. Of the 56 lowest closes since 1990 the majority of them were just last year.

This period of calm could continue much longer than most think possible but it's also true that the time to be afraid is when fear has left the building. The Minsky Moment is when stability leads to instability, as it always does, when that last snowflake falls (a seemingly insignificant event that normally would not shake the market) and the avalanche takes out everyone in its path. Do have your protective gear in the event of an avalanche? For us that would mean methods of protecting against a strong decline, such as puts, short positions or inverse ETFs. If you don't want to sell then it's at least a good time to buy some insurance (and then hope you don't need to use the insurance, like all the other insurance plans we buy).

The stock market rally is stretched to the upside, which I think we can all agree on. If you don't believe that statement then I'll suggest you're not investing with your eyes wide open and looking for danger. Most of the fundamental measures of the stock market, such as P/E ratios (both forward and trailing) are extraordinarily high and the highest among other nations as well (Europe, UK, Asia and Emerging Markets). The CAPE (Cyclically-Adjusted Price-to-Earnings multiple) is accepted by most as one of the more accurate measures of stock value and it's not at a comforting level if you're leverage long the market.

The CAPE compares the S&P 500 to its average, annual inflation-adjusted earnings over the past 10 years and its current reading is 31. This is well above its 15-year average of 25 and almost twice its long-term average (since 1881) of 16.8. At 31 it joins only two other times it got above 30 -- in 1929 and between 1997 and 2002. Both of those times were not good times to be complacent about the upside and while it could certainly continue higher, it's prudent to be cautious. It's kind of like playing with the cryptocurrencies right here.

And with that I'll move to the charts. As I had mentioned a week ago, I was looking for the rally to continue into this week and a possible high by January 3rd, today. The consolidation went a little longer than I had expected (into the end of last week) and therefore there's a possibility we'll see the rally continue into the end of this week. But at this point I think we're very close to putting in an important high and it could soon be the bear's turn at the feeding trough.

S&P 500, SPX, Weekly chart

With today's rally SPX achieved its first and second upside targets that I've been watching for. The first one is near 2705, which is where the extended 5th wave of the rally from 2009 is 162% of the 1st wave. As shown on the daily chart further below, that's also where the extended 5th wave of the leg up from August equals the 1st through 3rd waves. So that check is now in the block. The second target is 2711, which I'll point out on the 60-min chart further below and it's a potentially important level on the Gann Square of 9 chart, also discussed further below.

On the weekly chart I show a projection at 2718, which is where the 5th wave of the rally from February 2016 equals the 1st wave and with today's high at 2714 it's only 4 points higher. A little higher is the trend line along the highs of the rally from February 2016, currently near 2727. With the market overbought on all time frames I think it's a good time to pull up your stops on trading positions as SPX reaches potentially strong resistance.

S&P 500, SPX, Daily chart

Last week's break of the uptrend line from November 15th turned into a head-fake break (bear trap) as it recovered back above the line today. As mentioned above, the trend line along the highs from April 2016 - March 2017 is now near 2727 and the trend line along the highs of the rally from August is also near 2727 and it will be near 2732 by the end of the week. As shown on the 60-min chart further below, there's a projection at 2734, which I consider the highest we'll see but if we're into a true blow-off top then it could go much higher. Above 2740 would tell me to watch in awe as the blow-off rally continues. Just watch out for the reversal back down if that happens. A drop below last Friday's low near 2673 is what would tell us a top is in place.

Key Levels for SPX:
- more bullish above 2740
- bearish below 2673

S&P 500, SPX, 60-min chart

As mentioned above, 2711 is an upside target and that was achieved today. That level is where the 5th wave of the rally from December 1st is 62% of the 1st wave. At this point all the pieces are now in place to call a top at any time. The rally could stretch higher but now is a good time to be extra cautious on the long side and start preparing for what you want to play on the short side (but not yet). As shown on the 60-min chart, there's further upside to the trend line along the highs from September-October, near 2730 by midday Friday, and then the projection at 2734, which is where the 5th wave of the rally from December would equal the 1st wave.

The reason I keep mentioning all these 5th wave projections is because we're in 5th waves at multiple degrees of the pattern (each 5th wave consists of its own 5-wave move, right down to the intraday patterns). The 5th wave of the rally from December 1st is the leg up from last Friday and it will complete the larger 5th wave of the rally from August, which will complete the 5th wave of the rally from February 2016, which will complete the 5th wave of the rally from 2009. If I have the wave count correct, this is going to be an important high, one which will stand for a very long time.

Besides the wave, Fib and trendline projections for SPX, and why I'm interested in watching the upside targets carefully for signs of topping, I have the Gann Square of 9 chart also highlighting potentially important levels in the same area. I don't want to get into the weeds with this technical tool (I can see your eyes already glazing over with all this Elliott Wave talk) but I think it's important to try to cover it. Many will poopoo this Gann chart and just throw it into the same bin as Elliott Wave and Fibonacci, or maybe astrology, but these tools can be very enlightening, as the Gann Sof9 chart was at the October 2007 high and March 2009 bottom.

The confluence of similar levels is always a reason to pay attention and while they don't predict a trend reversal they are reason to watch for the possibility of one. The portion of my Gann Sof9 chart below is squished to fit it onto the page so I apologize for the tiny print. I added some larger numbers to point out the potentially important levels.

Gann Square of 9 chart

The red vector pointing to 11:00 is the one through the October 2002 low at 768 and the October 2007 high at 1576. There was clearly a direct relationship between those two numbers, especially being 6 "circles" away from each other. There are six squares or sides of a cube and the relationship between these two numbers was one of the reasons I was pounding the table back in October 2007 to watch out for a potentially important high, which it was.

The blue vector pointing to 1:00 goes through the March 2009 low at 666. A little harder to see, there's a green vector just to the right of the blue one and it is square to March 6th (just visible at the bottom right side of the chart). The green vector goes through 667 and the March 6, 2009 low was 666.79, arguably closer to 667 than 666. There was clearly a Gann reason to look for that low on March 6th to be an important one, which it was.

To the right, the red vector pointing to 2:00 is "square" to the red one through the October 2007 high. These square relationships are often very important and it goes through 2711, which was achieved today. Not visible at the bottom of my Gann Sof9 chart is the end of the red vector pointing to 5:00. The date that it's pointing to is January 3rd, which of course is today. That makes the square at 2711 especially important and it's possible today's rally is all we'll see but there's still a little higher potential to the 2721-2723 area on the chart.

If the rally continues on Thursday, the blue vector pointing to 4:00 is square to the 2009 low at 666 and it crosses through 2721. The green vector that is square to 667 crosses through 2723, all of which gives us the next Gann target zone at 2721-2723. Again, this is not a prediction that the market will top at any of these levels but in combination with what I'm seeing on the SPX charts I think it's very important to stay aware of the potential for an important market high this week.

And now back to our regularly scheduled charts.

Dow Industrials, INDU, Daily chart

Since early December I've been watching for an upside target zone for the Dow at 24775-25026. That's a fairly wide zone and once the Dow reached 24775 and consolidated sideways near that level it began to look like the higher target was in play. This week's rally has made the upper target at 25026 likely and it could head even higher if it's going to reach for the top of a rising wedge for the rally from December 1st, which will be near 25340 by the end of the week. I don't think we'll see the Dow that high but with this market I certainly wouldn't rule out the possibility.

The Dow is back-testing the bottom of the rising wedge, which it broken below last Friday. The short-term pattern for the rally can be considered complete at any time and if the market gaps down on Thursday, instead of the usual gap up, we could selling pick up speed in a hurry. There are a lot of fund managers with their fingers resting on the sell button to protect profits, especially now that we're into the new year and the lower tax rates. A drop below last Friday's low at 24719 would tell us a top is in place.

Key Levels for DOW:
- bullish above 25,026
- bearish below 24,719

Nasdaq Composite index, COMPQ, Daily chart

The Nasdaq made it through a price projection at 7006, where the 5th wave of the rally from August equals the 1st wave, where it had stopped on December 18th and again yesterday, and today it made it up to the next resistance level, near 7070 (today's high was 7069). A trend line along the highs since August 2016 and a shorter-term one along the highs from November 28 - December 18 are both near 7070 and will be near 7086 by the end of the week. Not shown on the daily chart below, there's also a price projection at 7070, which is where the 2nd leg of the rally from December 6th is 62% of the 1st leg up.

As with the other indexes, the pieces are now in place to be able to call a top at any time and any sharp reversal back down would be reason to believe a top is in place. In the meantime there's further upside potential to at least the top of its parallel up-channel for the rally from August, which will be near 7130 by the end of the week. A strong rally much above 7140 would indicate the blow-off top is in progress and don't get in its way.

Key Levels for COMPQ:
- more bullish above 7140
- bearish below 6903

Russell-2000, RUT, Daily chart

The RUT has been acting weak since last Friday and that's a bit concerning if you're a bull. It has barely been able to make a new high above its December 18th high at 1552, with today's high at 1555, but it has not been able to climb above its December 4th high near 1560. A trend line along the highs from December 2016 - October 2017 is currently near 1559 and there's a price projection at 1562, which is where the 5th wave of the rally from February 2016 would equal the 1st wave. I think 1559-1562 is a good upside target zone for the RUT and then more bullish above 1562.

Key Levels for RUT:
- bullish above 1562
- bearish below 1535

U.S. Dollar contract, DX, Daily chart

The US$ is at an interesting place and it's time to flip a coin for direction. Once it dropped back below 94 and back-tested it in mid-December I've been short-term bearish with an expectation for a decline to the $90 area to complete a 5-wave move down from January 2017. But where it dropped to yesterday and now with today's bounce I'm beginning to wonder if we'll see the start of the next rally leg.

Notice where yesterday's low stopped -- it could be viewed as a bullish back-test of the top of the broken down-channel for the decline from January 2017. Granted it's the 2nd back-test and that's often a sign of weakness, not impending strength. But it also achieved two equal legs down from November 7th, at 91.57, and that could be the completion of an a-b-c pullback correction in a new bull market for the dollar, starting off its September low. Daily RSI is curling up from oversold and that's another supporting factor for the bulls.

If the dollar does continue lower I'll be looking for $90, especially if any bounce/consolidation looks choppy and corrective. But if the bounce turns into a sharp rally then it would support the idea that the pullback is complete and a new rally leg has started. Back above 94 would confirm the new rally but there should be confirming evidence before that line is crossed.

Gold continuous contract, GC, Daily chart

Gold has rocketed higher over the past 3 weeks, from a low at 1238.30 on December 12th to a high today at 1323.0 (+$85, +6.9%) and broke through several layers of resistance with the strong rally, the last of which was price-level resistance at 1300. It certainly looks like it's in breakout mode and could very well be but short term I think it's ready for at least a pullback correction before heading higher.

Paradoxically, the strong 3-week rally could turn into a bull trap since the leg up from December 12th fits well as the c-wave of an expanded flat correction off the higher low on October 6th. This kind of pattern, with the lower low in December and then the blast higher out of that, is a common completion to a correction to the initial decline from September. It's too early to tell if this is the correct pattern interpretation but if it is then we're going to see gold start back down.

If we see a corrective pullback over the next week or so that finds support at or above its moving averages, which should be near 1280, it would be a good setup for a continuation of the rally. But back below its nested 20-, 50- and 200-dmas and it will be stronger confirmation that that the 3-week rally was only completing a correction to the decline and not something more bullish.

Oil continuous contract, CL, Weekly chart

Commodities look like they could be starting a bullish move and that would very likely include oil. If oil can get above resistance near 62.30 (today's high so far in after-hours trading is 61.97) we could see a continuation of its rally from June and potentially up to the $85 area to achieve its inverse H&S price objective. But there is a corrective pattern inside a rising wedge for the rally from February 2016 that suggests its rally is about to end. Interestingly it bottomed in February 2016 with the stock market and now it could be putting in a top at the same time as the stock market.

The top of the rising wedge is the resistance near 62.30 that oil needs to get through (with something more than a quick pop above that level and then a collapse back down, which would then give us a sell signal. Daily and weekly oscillators are overbought and therefore it's a risky time to bet on further upside until it can prove it can get through resistance and stay above it.

Economic reports

Thursday morning's economic reports will include the ADP Employment Change, which is expected to show only a minor gain in December -- up 5K from the 190K in November. Unemployment data and oil and gas inventories will also be reported and therefore nothing much in the way of market moving reports. Friday we'll get the NFP and other employment data before the opening bell and then Factory Orders and ISM Services at 10:00. The NFP is expected to show +195K (same as ADP expectations) in December, which would be a drop from the +228K in November.


As Ronald Reagan said to Jimmy Carter in the presidential debates, "there he goes again." That would be me trying to pick a top and in this market that has been an exercise in frustration. All I can do is point out where I think a top could occur but actually predicting a top is a fool's errand. And right now I see plenty across the indexes, and even for oil, gold and the dollar, that tells me I should be looking for reversals and potentially major reversals. I'm not predicting a top; I'm warning you of one.

That would mean a reversal back down for the stock market, oil and gold (and possibly other commodities) and a rally for the dollar. The stock market indexes look especially vulnerable until they can power through some important resistance/target levels, which I outlined above and are shown on the charts. If you're long and looking to exit trading positions I would pull stops up real tight right now. If you're in longer-term hold (otherwise known as hodl in the crypto world) positions and you don't want to liquidate them then I'd think very seriously about hedging your positions. Buy the insurance and hope you never need to use it.

As mentioned above, the pieces are now in place to be able to call a market top at any time but I do see further upside potential at least into Friday. I'd be surprised if I'm still looking for higher highs this time next week (but of course I've been surprised by this market more than a few times).

Picking a top in a bull market is obviously a challenging thing to do and obviously trying to catch rising knives is not for the risk averse. I challenge myself to pick tops and bottoms because I like to play reversals (put options are cheaper on the way up than on the way down at the same price level). Others prefer to play just the trend until the trend breaks and take whatever loss there is (hopefully only a loss of some of the profits) when that trend is confirmed broken.

We have a long way to go before the uptrend is broken and therefore it's important to understand what I'm attempting to do. If you're sticking with the trend (obviously a winning strategy for a very long time) then you're still good. If you like to play reversals and/or hedge yourself against reversals, now is a good time to watch very carefully since I think an important one is about to hit us.

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

Activist Target

by Jim Brown

Click here to email Jim Brown

Editors Note:

No declines in Akamai with Elliott Management upping their stake.


AKAM - Akamai Technologies - Company Profile

Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers Web and mobile performance solutions, such as Ion, a situational performance solution that consists of an integrated suite of Web delivery, acceleration, and optimization technologies; Dynamic Site Accelerator that helps in consistent Website performance; IP Application Accelerator to enable enterprises to deliver Internet Protocol-based applications; Global Traffic Management, a fault-tolerant solution; Image Manager that automatically optimizes online images; and Cloudlets, which provides self-serviceable controls and capabilities. It also provides cloud security solutions, including Kona Site Defender, Bot Manager, Fast Domain Name System, Prolexic Routed, and Client Reputation; enterprise solutions comprising Enterprise Application Access and Akamai Cloud Connect. In addition, the company offers media delivery solutions, such as adaptive delivery solutions, download delivery solutions, media delivery acceleration solutions, media services, media analytics, and NetStorage, a cloud storage solution. Further, it provides network operator solutions, including Aura Licensed CDN suite of solutions, Aura Managed CDN solutions, and Intelligent DNS Solutions; and professional services and solutions. Company description from FinViz.com

Expected earnings Feb 6th.

Akamai reported Q3 earnings of 62 cents that beat estimates for 59 cents. Revenue of $621.4 million beat estimates for $610 million. Web division revenue rose 14% to $328 million. Media division revenue fell -1% to $273 million. Enterprise and carrier division revenue rose 2% to $20 million. Performance and security solutions revenue rose 11% to $381 million. Cloud security solutions revenue rose 27% to $121 million. Services and support revenue rose 12% to $57 million. International revenue rose 18% to $213 million. Cash on hand was $1.4 billion. They repurchased $129 million shares of stock in the quarter.

Shares spiked $4 on the report but faded over the next week. Deutsche Bank reiterated a buy rating and raised their price target to $75. The analyst pointed to what would be monster traffic volumes from the Winter Olympics in Q1 and the World Cup Soccer in Q2.

In October, Akamai announced the acquisition of Nominum, a market leader in DNS and enterprise security solutions for carriers. Akamai also announced the launch of Bot Manager Premier, designed to help organizations manage the impact of bots across their entire digital environment, including websites, mobile applications and wed APIs.

The company guided for Q4 revenue of $638-$656 million with gross margins of 65% to 77%. Earnings are expected to be in the 60-65 cent range after a 4-cent impact from the acquisition of Nominum. They are forecasting 5% to 8% growth for the year with a 64% gross margin. There is nothing wrong with their business.

Akamai said the rapid advancement of video on demand was a strong factor in future earnings since they are the largest provider of content. Also seeing a rapid ramp was the cloud storage business. Akamai has a security hook in that growth and the redundancy of that storage.

Akamai collaborated with Google, Cloudfire, Flashpoint, RiskIQ and the RBI to squash a botnet named WireX that had infected 120,000 Android phones in early August. The bot was generating 20,000 page requests a second against a set of targeted servers in a DoS attack.

Akamai announced it had set a new record for throughput delivered on September 12th with more than 60 terabytes per second (Tbps). That beat the old record of 47 Tbps set on August 29th. Akamai delivers more content on a daily basis than any other content provider. In January 2017, they set a single event record of 8.7 Tbps streaming the Presidential Inauguration. The company has more than 200,000 servers spread across 130 countries to accomplish this record content delivery.

Akamai announced the Content Delivery Network (CDN) capabilities for enterprises are now available on the IBM cloud. The new offering is part of the IBM Cloud Content Delivery Network. Akamai currently provides CDN services on 1,700 networks in 131 countries. That now included IBM's footprint of 60 cloud centers across 19 countries. Akamai has more than 200,000 servers across 130 countries.

In mid December Elliott Management disclosed at 6.5% stake in Akamai saying the shares were significantly undervalued. Elliott said it would attempt to talk with the board, other shareholders and potential acquirers about strategic alternatives. Shares spiked to $67 on the news and have faded only slightly with support appearing at $65.

I have to use the May calls because the February calls have a $1.25 bid/ask spread on a $3 option. Just because we buy May does not mean this is a long term position. We will exit before the Feb 6th earnings. I am just using May because the bid/ask spread of only 35 cents. They should also hold their premium better than the February strikes.

Buy May $70 call, currently $3.45, initial stop loss $64.


No New Bearish Plays

In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes confirmed Tuesday's gains with another surge to higher record highs. It is 2018 and sellers are nowhere to be found. The major indexes are breaking out and stock upgrades are flying fast. The Santa Rally concluded with record closes and the only potholes on the horizon are a possible sell the news event at Dow 25,000 and a potential government shutdown on January 19th. Otherwise, the market looks good.

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

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BULLISH Play Updates

ARNC - Arconic Inc - Company Profile


No specific news. Continued rebounded to a 6-month high close.

Original Trade Description: December 27th.

Arconic creates breakthrough products that shape industries. Working in close partnership with our customers, we solve complex engineering challenges to transform the way we fly, drive, build and power. Through the ingenuity of our people and cutting-edge advanced manufacturing techniques, we deliver these products at a quality and efficiency that ensure customer success and shareholder value. Company information from Arconic.

Earnings January 22nd.

Arconic was the original Alcoa. They spun off the aluminum business then changed their name to Arconic. This company makes precision aluminum parts for aircraft and transportation equipment. Eliott management has been agitating for change and managed to get the long term CEO Klaus Kleinfeld kicked out and oversaw the five-month process to get 24-year GE veteran Charles Blankenship installed as the new CEO.

Elliott has seen their investment lag for the last year as the spinoff and CEO hunt took the wind out of Arconic's sales. Now they could be reaching the end of their struggle with a potential buyout on the horizon.

One analyst got the fire started a couple weeks ago when he suggested Honeywell was on the prowl and would eventually buy Arconic. Honeywell lost out on Rockwell Collins (COL) when United Technologies bought them for $30 billion or 14 times EBITDA.

Honeywell was under pressure by Dan Loeb to spin off its aerospace unit. Instead, they agreed to spin off the homes and global distributions unit and the transportation business leaving (by the end of 2018) the aerospace unit intact and the surviving business. Now Honeywell needs to bulk up its aerospace business of they will be the nex company acquired.

With Dan Loeb on one side urging Honeywell to build aerospace and Elliott Management on the other side urging Arconic to sell itself, this is a match made in heaven and could happen in early 2018 according to the analyst.

Shares have sprinted higher since the news story broke a couple weeks ago. They are very close to a 52-week high over $28 and a move over that level could trigger additional buying and short covering.

I am using a July option to get well past the January and April earnings. We will not hold it that long but the uncertainty surrounding those events should keep the premium up if we have a market drop in January.

Position 12/28/17:

Long July $30 call @ $1.50, see portfolio graphic for stop loss.

BITA - BitAuto Holdings - Company Profile


No specific news. Big gain to a new 5-week high.

Original Trade Description: December 30th.

Bitauto Holdings Limited provides Internet content and marketing, and transaction services for the automotive industry in the People's Republic of China. The company operates in three segments: Advertising and Subscription Business, Transaction Services Business, and Digital Marketing Solutions Business. The Advertising and Subscription Business segment provides advertising services, including new automobile pricing and promotional information, specifications, reviews, and consumer feedback to automakers through its bitauto.com and taoche.com Websites, as well as mobile applications. It also provides Web-based and mobile-based integrated digital marketing solutions to automobile dealers. The Transaction Services Business segment operates automotive transaction services platform that provides e-commerce transaction services to automobile dealers; and offers online automotive financial platform services to consumers and financial institutions, including banks, auto finance companies, and insurance companies. The Digital Marketing Solutions Business segment provides one-stop digital marketing solutions, such as Website creation and maintenance, online public relations, online marketing campaigns, and advertising to automakers. The company also distributes its dealer customers' automobile pricing and promotional information through its Internet service provider partners. Bitauto Holdings Limited was founded in 2000 and is headquartered in Beijing, the People's Republic of China. Company description from FinViz.com.

For Q3 BITA reported earnings of 23 cents that missed estimates for 33 cents. Revenue of $352.4 million rose 54% and beat estimates for $334 million. They guided for Q4 revenue of $360.7 to $368.3 million, a 51% increase, and that was well above estimates at $331 million.

Shares were crushed on the earnings miss despite the 54% increase in revenue and strong guidance. Their Yixin website generated approximately 140,000 automobile transactions in Q3. Active monthly users rose to 51 million and they have more than 15,000 dealerships in the network. Transaction services rose 145.7% in Q3. Advertising and subscription service businesses saw revenue rise 19.3%. The company ended the quarter with $487 million in cash.

Their Yixin subsidiary IPOed on the Hong Kong exchange on Nov 15th and that raised a significant amount of money that will allow them to rapidly expand that portion of the business. The perceived dilution was also a factor in the stock decline.

The company is growing rapidly and guidance was very strong. There is no reason why the shares should not continue rebounding. There is strong support at $28.50.

I am recommending a February option because it is cheap. Normally I would reach out to the next month to capture the expectation premium of their Feb 19th earnings but the options are twice as expensive and with potential market volatility in January, i would rather risk less with cheaper options.

Position 1/2/18:
Long Feb $35 call @ $1.55, see portfolio graphic for stop loss.

CAR - Avis Budget Group - Company Profile


No specific news. Shares are not participating in a bullish market. I am recommending we close the position.

Original Trade Description: December 23rd.

Avis Budget Group, Inc., together with its subsidiaries, provides car and truck rentals, car sharing, and ancillary services to businesses and consumers worldwide. The company operates through two segments, Americas and International. It operates the Avis brand car rental system with approximately 5,550 locations that supply rental cars to the premium commercial and leisure segments of the travel industry; the Budget brand vehicle rental system with approximately 4,050 car rental locations, which serve the value-conscious segments of the industry; and the Zipcar brand, a membership-based car sharing network that provides vehicles to approximately 1 million members. The company also operates the Payless brand, which comprises approximately 240 vehicle rental locations; the Apex brand primarily in the deep-value segment of the car rental industry with approximately 25 rental locations in New Zealand and Australia; and the Maggiore brand that provides vehicle rental services in the commercial, leisure, and insurance replacement/leasing segments with approximately 130 rental locations in Italy, as well as the France Cars brand, which offers light commercial vehicle fleets with approximately 60 rental locations in France. In addition, it is involved in the local and one-way truck rental businesses with a fleet of approximately 22,000 vehicles, which are rented through a network of approximately 1,000 dealers and 480 company-operated locations that serve the consumer and light commercial sectors in the continental United States. Further, it offers optional insurance products and coverages, such as supplemental liability, personal accident, personal effects protection, emergency sickness protection, automobile towing protection, and cargo insurance products. The company was formerly known as Cendant Corporation and changed its name to Avis Budget Group, Inc. in September 2006. Avis Budget Group, Inc. was founded in 1946 and is headquartered in Parsippany, New Jersey. Company description from FinViz.com.

Expected earnings Feb 6th.

Avis Budget reported Q3 earnings of $3.10 that beat estimates for $2.97. Revenue of $2.75 billion also beat estimates. The company guided for full year earnings in the range of $2.45-$2.65 on revenue of $8.8-$8.9 billion. Prior guidance was $2.40-$2.85 on revenue of $8.80-$8.95 billion.

The big drop in the chart in early November is the lowered earnings guidance. Fortunately, for CAR they have already recovered from the drop and are moving higher. Part of the lift came from news their largest shareholder, SRS Investment Management, had boosted their stake by 41% to 12 million shares or 14.7% of the shares outstanding. SRS had previously disclosed a new position with a stake of 10.4% as of September 30th. They are continuing to buy and they already own stakes in other car companies. They have 24 total positions worth more than $5 billion and they are not an activist shareholder. They are a hedge fund.

Shares of CAR made a new two-year high on Monday and drifted lower on Tuesday. After holding their gains for a week, it looks like they will try to make a higher high.

I am trying to recommend a position that should make only a minimal decline if we see some profit taking in January. Big names like Boeing or Home Depot could sell off hard. This is a stock that is recovering from a drop to $21 back in the summer and another $8 drop in November. Any weak holders should have already left.

Position 12/29/17:

Long Feb $46 call @ $1.85, see portfolio graphic for stop loss.

Previously closed 12/28: Long Feb $46 call @ $2.50, exit $1.65, -.85 loss.

CGNX - Cognex - Company Profile


No specific news. Shares finally broke out of their dormancy and surged $2.33 today on no news. The company did announce they would make a financial presentation at the January 18th Needham Growth Conference but I would be surprised if that was the reason for the spike.

Original Trade Description: December 9th.

Cognex Corporation provides machine vision products that capture and analyze visual information in order to automate tasks primarily in manufacturing processes worldwide. The company offers machine vision products, which are used to automate the manufacturing and tracking of discrete items, such as mobile phones, aspirin bottles, and automobile tires by locating, identifying, inspecting, and measuring them during the manufacturing or distribution process. Its products include VisionPro, a software suite that provides various vision tools for programming; displacement sensors with vision software for use in 3D application; In-Sight vision systems that perform various vision tasks, including part location, identification, measurement, assembly verification, and robotic guidance; In-Sight vision sensors; ID products, which are used for reading codes that are applied on discrete items during the manufacturing process, as well as have applications in logistics automation for package sorting and distribution; DataMan barcode readers; barcode verifiers; vision-enabled mobile terminals for industrial barcode reading applications; and barcode scanning software development kits. The company sells its products through direct sales force, as well as through a network of distributors and integrators. Cognex Corporation was founded in 1981 and is headquartered in Natick, Massachusetts. Company description from FinViz.com.

Cognex is a tech stock where growth is booming. Every manufacturer is looking to automate as many tasks as possible and Cognex provides them the opportunity with robotic vision equipment that can inspect and track items much faster than humans.

For Q3 they reported earnings of $1.14 that beat earnings for $1.05. Revenue of $259.7 million beat estimates for $256.8 million. They guided for the current quarter for revenue of $170-$180 million and analysts were expecting $155 million. That was a major guidance beat.

Expected earnings Jan 29th.

They announced a 2:1 split that was effective on December 4th. Shares immediately sank $7 on post split depression and Nasdaq rotation but have rebounded the past two days. The 50% decrease in the stock price also reduced the option premiums by 50% and made them cheap enough to buy.

Position 12/11/17:

Long Feb $67.50 call @ $3.20, see portfolio graphic for stop loss.

PYPL - PayPal - Company Profile


No specific news. Shares surged $3 in a bullish Nasdaq market.

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 reentered 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.

Update 12/13: BMO Capital raised their price target from $80 to $85 saying the sale of the credit business will reduce expenses and increase earnings per share. The sale will free up $1.0 billion in cash for 2018 and $2.5 billion in 2019.

Position 11/30/17:

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

TGT - Target Corp - Company Profile


No specific news. Shares only declined slightly from Tuesday's high.

Original Trade Description: December 13th.

Target Corporation operates as a general merchandise retailer. It offers household essentials, including pharmacy, beauty, personal care, baby care, cleaning, and paper products; dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and pet supplies; and apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. The company also provides home furnishings and decor, such as furniture, lighting, kitchenware, small appliances, home decor, bed and bath, home improvement, and automotive products, as well as seasonal merchandise, such as patio furniture and holiday decor; music, movies, books, computer software, sporting goods, and toys, as well as electronics, such as video game hardware and software. In addition, it offers in-store amenities, including Target Cafe, Target Photo, Target Optical, Starbucks, and other food service offerings. Target Corporation sells products through its stores; and digital channels, including Target.com. As of September 13, 2017, the company operated 1,816 stores in the United States. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota. Company description from FinViz.com.

I would not normally recommend a retailer only two weeks before Christmas but I expect Target to overcome the normal post holiday depression.

Earnings Feb 14th.

Target announced on Wednesday they were buying grocery delivery platform Shipt Inc for $550 million in cash. The company said they would be offering same day delivery across all major product categories by the end of 2019. They will be offering same day delivery for groceries, essentials, home products, electronics and other items by mid 2018.

Shipt's services cost $99 a year for unlimited deliveries. Shipt already has a network of more than 20,000 personal shoppers to fulfill orders from various retailers and deliver within hours in more than 72 markets. Shipt partners include stores like Costco, Whole Foods, Meijer, etc.

Target is going to continue letting Shipt deliver for their other customers. The more widely recognized the brand is the larger it will grow and Target will be able to benefit from their ability to scale deliveries all over the country. Plus, they will profit from the fees received for those other deliveries.

This is a great deal for Target as it ramps up competition against Amazon.

I wrote last week that shippers were noting the increase in packages from Target. They were the second largest volume in UPS trucks after Amazon. They should have a great Q4.

Update 1/2/18: Influential tech analyst Gene Munster said he believes Amazon will buy Target in 2018. Target has a market cap of $37 billion but it would require a huge premium to get a deal done, probably something in the $50 billion range. Amazon has a market cap of $573 billion. The deal makes sense in the long run because it would give Amazon 1,802 major store outlets with a huge warehousing system that Amazon could use to its advantage. The addition of Amazon specific products to the already broad range of products offered by Target, would be a major boost to Amazon sales. The stores would function as customer delivery points for Amazon packages and because of the large store footprint it would allow Amazon to expand its same day, next day delivery offering to most of the US.

While it might make sense on paper, I would not hold my breath expecting a deal to be done. That would be a big bite for Amazon and there may be a problem getting regulatory approval. President Trump already believes Amazon is a monopoly with too much power and that could keep a deal from completing.

Position 12/14/17:

Long March $65 call @ $2.90, see portfolio graphic for stop loss.

TRN - Trinity Industries - Company Profile


No specific news. Minor decline and holding at the 3-year highs.

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.

Update 12/12: Trinity announced a plan to spin off the company's infrastructure related businesses to shareholders. The tax free spin will occur in late 2018. The infrastructure businesses are leaders in their respective sectors with construction, energy and marine markets. Trinity manufacturers highway guard rails, crash cushions and other barriers. It supplies various aggregates including sand, stone, shale, clay, asphalt and steel products for infrastructure projects. Read the description below for the full list.

This will allow Trinity to concentrate on its highly profitable rail business where it manufactures, sells and leases railroad cars.

The company also announced a $500 million share repurchase program.

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


Today was a game changer. The Dow finally broke over resistance at 24,850. Thise might have been the death knell for this position. There are two events left. One would be a touch of 25,000 and the second would be a government shutdown on the 19th.

I have considered closing the position but the potential for a January market crash is too strong to be unprotected. If we were not in this position, I would be adding it now.

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.

Update 12/18/17: The Dow is moving ever closer to 25,000, which could end up being a monster sell the news trigger. The Dow is up 6,900 points since the election. That is 38.5% in 13 months. There is a 100% chance there will be a correction in the future. The only unknown is when.

I am recommending we close the short put side of the spread. That captures that portion of the trade and once the Dow rolls over we do not have to deal with the rise in value in the short put. Secondly, that gives us other options to raise additional premium in the future, including selling a higher put if the index does not decline.

Position 11/17/17:

Long March $230 put @ $5.16, see portfolio graphic for stop loss.

Closed 12/19: Short March $210 put @ $1.71, exit .43, +1.28 gain.

QQQ - Nasdaq 100 ETF - ETF Profile


The Nasdaq continued to surge higher and posted a big breakout over 7,000 by 65 points. I am recommending we exit this position.

Original Trade Description: December 18th.

PowerShares QQQ, formerly known as "QQQ" or the "NASDAQ-100 Index Tracking Stock", is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.

The Nasdaq Composite hit 7,000 intraday and came to a dead stop. Less than half the big cap tech stocks made a material contribution. The index has gained 260 points in the last two weeks and the majority of those points were the last two days. The Nasdaq has hit long-term uptrend resistance.

The Nasdaq 100 hit round number resistance at 6,500 and stopped. The $NDX is up roughly 300 points over the same two-weeks.

While there is nothing preventing the indexes from moving higher, they are now well into overbought territory. The lack of participation by half the big cap stocks is troubling. Many investors have large gains in tech stocks after the 1,950 points the index has gained since the election. Since taxes will be lower starting on January 2nd, that gives investors an incentive to hold on to their gains until January. That incentive expired on December 31st.

There have been numerous minor dips along the way but those dips have grown progressively shallower in recent months. The Nasdaq rally may be building to a climax over the next several weeks.

The Nasdaq Composite is 12% over its 50-week average and 24% over its 100-week average. Neither have been touched since July of 2016. These are extreme levels of bullishness.

I am recommending we buy a February put on any weakness in the QQQ. I do not want to jump in front of the moving train but I do want to be short if a derailment occurs. Support is back at $152.

Position 12/19 with a QQQ trade at $157.75
Long Feb $156 put @ $2.40. See portfolio graphic for stop loss.

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