Option Investor

Daily Newsletter, Wednesday, 9/2/2015

Table of Contents

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

Market Wrap

V-Bottom Reversal in Doubt

by Keene Little

Click here to email Keene Little
For what seems like years, each spike down in the stock market has been met with a v-bottom reversal and a rally to new highs. Last week's v-bottom reversal had many thinking the same thing was happening again but this week's decline now has many questioning whether it's going to be different this time. The volatile price swings is certainly keeping both sides jumpy.

Today's Market Stats

Last week's strong reversal off the spike low on Monday, with the large weekly hammer at support levels for the indexes, certainly looked like the typical v-bottom reversal we've come to expect in this market. But the decline was more significant than any seen since the decline into the October 2011 low and the reversal off the August 24th low had a different daily pattern, which suggested it might be different this time. This past Monday's decline followed by Tuesday's strong decline now has many questioning whether it really is different this time.

Today started with a gap up, thanks to an overnight rally in equity futures, but the market struggled following the gap up. A pullback was followed by another rally back up to the morning highs where the indexes stalled mid-afternoon. But some buying in the final 30 minutes pushed the indexes to highs for the day and most closed at their highs, which had the market looking bullish. Too bad these late-day spurts to the upside are often followed by an immediate reversal the next day (one sign of the bears).

The bounce off Tuesday afternoon's low fits best as a correction to an impulsive decline from last week's highs, both of which suggest we'll see lower prices this week. Depending on how I interpret the pattern for the decline from July (May for the DOW), I can see the possibility for just one more low (or test of last week's lows) before setting up a stronger bounce correction this month, or we could see the market stair-step lower into mid- to late-September before setting up a bigger bounce into October/November. I'll point out on the charts what to watch for in the coming week(s).

The day started with a few important economic reports this morning, starting with the ADP Employment report before the bell. It was somewhat of a goldilocks number at 190K, which was less than the expected 201K but better than July's 177K (which was revised lower from 185K). Not too hot, not too cold, but just right for the Fed to raise rates if that's what they're burning to do.

Hurting the Fed's cause (to raise rates in September) was the Unit Labor Costs (revised) for Q2, also released before the bell. It dropped -1.4%, which was below the expected -0.9% and well below the +0.5% for Q1. A decline in the labor costs reflects a slowing economy in which there is no wage pressure and raising rates would only put the economy at further risk.

Another sign of a slowing economy came from this morning's Factory Orders report, which was +0.4% for July and less than the expected +0.9%. Disappointingly, for the economy, this was a strong drop from June's +2.2% (which was revised higher from the originally reported +1.8%. A lack of wage pressure (used by the Fed as an inflation indication) and more signs of a slowing economy make it harder for the Fed to raise rates. The chart below shows Factory and Durable Goods Orders for the past 15 years and the sharp drop since last October's high has not been an encouraging sign.

Factory and Durable Goods Orders, July 2000 - July 2015, chart courtesy briefing.com

This afternoon the Fed Beige Book was released and was somewhat mixed but the bottom line is that it makes it harder for the Fed to justify raising rates this month. The report cited growing wage pressures in several of the Fed's 12 districts, although that was called into question with today's labor costs report. The report also cited the strong dollar and declining oil prices as depressing economic activity. China's slowdown was the reason given for reduced demand for wool products, chemicals and high-tech goods. China's slowdown and the impact it's having on global stock markets is a real thorn in the side of the Fed when considering a rate hike. This is especially true since the Beige Book covers the period through August 24th, just as the markets were starting a stronger selloff. The report was generally optimistic but then again, economists have been optimistic through most of this year, even as the economy has shown signs of slowing. Generally speaking they continue to expect the economy to grow at a modest pace.

The market remains on a nervous watch in front of the next FOMC announcement on September 17th. There will be plenty of important economic/inflation reports between now and then and the market will be watching them closely, especially this Friday's NFP report since employment is an important measurement for the Fed. The more that Fed heads continue to talk about raising rates in the face of signs of a slowing economy, the more the stock market will struggle to get its footing.

Jumping into the charts, I'll start with the small caps and the RUT's weekly chart. I normally use trend lines on longer-term charts using the log price scale because I think it more accurately reflects the trends (as a percentage change instead of price). But I keep an eye on the trend lines using both scales because I know many traders use the arithmetic scale all the time. For the RUT, the uptrend line from October 2011 - October 2014, using the log price scale, was broken with the snap to the downside that started August 18th, which was near 1195 at the time. But when the trend line is viewed with the arithmetic price scale it's near 1169 and only about 4 points above Monday's high. On this chart it's looking like a break of a major trend line and now a back-test on Monday. A selloff from there would leave a bearish kiss goodbye so the bulls need to get the RUT above 1170 and keep it above.

Russell-2000, RUT, Weekly chart, arithmetic price scale

The chart above shows a price projection for the current decline to price-level support near 1040 by the end of September. The 200-week MA, now at 1022, might be close to that level by the end of the month as well. The expectation following a decline like that would be for a large bounce correction into November, maybe all the way back up to price-level S/R near 1215 and another back-test of its broken uptrend line. That would then set up a strong 3rd wave down into early next year. This is assuming THE high is now in place, which is yet to be proven. Notice too that a big bounce into the end of the year would set up a large H&S topping pattern that starts with the left shoulder as the 2014 highs.

The daily chart below depicts a decline this month that will essentially be a stair-step pattern lower to complete a 5-wave move down from June. There are enough differences between the indexes that tell us this is only one bearish possibility of many so for now it's just a projection and I'll need further price action to help confirm or negate it along the way. If this week's bounce gets the RUT above Monday's high near 1165 I'd look for a move up to its downtrend line from July, near 1192 by the end of the week. Two equal legs up for a larger a-b-c bounce off last week's low points to 1183 as an upside target. But first the bulls need to break the downtrend line from August 17th, near 1148 (marginally above today's high), and then price-level S/R near 1152.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1165
- bearish below 1124

As noted on the RUT's daily chart above, it has followed the DOW with a bearish death cross (50-dma crossing down through the 200-dma). This signal is not always reliable since it often marks a short-term washout to the downside and a reversal back to the upside. But for now it's a bearish warning sign and SPX also now has its own death cross (as of last Friday's cross). Unlike the RUT's wave count, I'm using a slightly less bearish idea for SPX, which calls for only one more new low to complete a 5-wave move down from July. I show a projection to the October 2014 low near 1820 but it be just a test of last week's lows near 1867 (or even a slightly higher low). Once the 5-wave move down is complete, assuming we'll get a new low (or test), it would then be a setup for a higher bounce into October before the real meat of the decline kicks in. The differences between the RUT and SPX wave counts simply means it will be time for bears to be cautious following a new low. As long as the bounces are 3-wave (or something choppier) corrections we'll stick with the short side but it's living through the bounces that's painful for bears.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1994
- bearish below 1867

Today's bounce to 1948 retraced 50% of the decline from last week and at the same time tested short-term price-level S/R near 1948 and its downtrend line from August 19th. It was a good setup to short the bounce but it was a scary setup because of the strong spike up in the final 30 minutes to the highs for the day. The bearish play needs an immediate reversal back down on Thursday and then the downside pattern shown on the 60-min chart below has a chance of playing out (for a drop down to 1820 next week).

S&P 500, SPX, 60-min chart

The wave count that I'm tracking on the DOW is the same as I have on the RUT, even though their price peaks were a month apart (May for the DOW, June for the RUT). It suggests we'll see the market stair-step lower this month and the DOW could drop down to the 14380 area where it would retrace 50% of its October 2011 - May 2015 rally. If that plays out we'd then have a very good setup to get long into November before joining the bears again. Today's rally brought the DOW back up to its broken uptrend line from March 2009 - October 2011, near 16350 (arithmetic price scale). It's another setup only a bear could love and we'll find out quickly Thursday morning if the bears pounce on it.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,300
- bearish below 15,980

With all the indexes breaking long-term uptrend lines, when using the log price scale, I'm looking at them with the arithmetic price scale since it drops the trend lines lower. Using this scale for NDX as well, it broke its uptrend line from 2012-2013-2014 on August 21st, bounced back above it last Thursday, hit its broken price-level support near 4345 and its broken 50-week MA, near 4331, and then sold off again this week. The back-test of price-level support-turned-resistance near 4345 and its 50-week MA, followed by the kiss goodbye, looks bearish. Back below the uptrend line is bearish. Now today's rally has brought it back up to its broken uptrend line, near 4257, and the bears are waiting for another kiss goodbye (like the DOW's setup above). If the bears pounce we could see NDX work its way down to its uptrend line from March 2009 - November 2012, near 3600 (arithmetic price scale), before the end of the month. For comparison purposes, the uptrend line from 2009 was last back-tested at its July high, near 4680.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4345
- bearish below 4121

While the stock market has been whipping up and down over the past week the bond market has been relatively quiet. It's like the parents watching little children scream and run around as if their hair was on fire. The TLT (20+ year T-Bond ETF) daily chart below shows a strong selloff following the back-test of its broken uptrend line from December 2013 - November 2014 on August 24th. But after three days of strong selling (rally in yields), the past five trading days have been muted. In fact it's looking like a bottoming pattern is setting up a rally in bond prices and with TLT back-testing its 50-dma at 120.83 (today's low was 120.86) it could start from here. A rally in bonds could put additional pressure on stocks as money rotates into the relative safety of Treasuries. However, if TLT loses support here we could see stronger selling in bonds and that would be supportive for stock market bulls.

20+ Year Treasury ETF, TLT, Daily chart

So many indexes and stocks have very similar patterns and therefore reviewing any more simply becomes repetitive. Keep an eye on any one of the above and you'll have a good sense about what the broader market is doing.

The U.S. dollar has been consolidating following last week's strong bounce back up but is still not yet near its downtrend line from March-August, currently near 98. I'm looking for a rally up to that line, either from here or after a little pullback correction, and then a continuation of a larger consolidation pattern into the end of the year. Next year we should see a bullish breakout (possibly sooner). As noted on the weekly chart below, as long as MACD stays above the zero line the dollar stays bullish. A return to the zero line while price consolidates, followed by a turn back up, is oftentimes a reliable buy signal (and the opposite for a sell signal).

U.S. Dollar contract, DX, Weekly chart

Gold's bounce off its July 24th low had achieved two equal legs up, at 1162.50, with a high at 1169.80 on August 24th. It tagged its downtrend line from January-May and then sold off into last Wednesday's low before bouncing again up to 1147.30 yesterday. The small bounce again looks like an a-b-c bounce correction to its decline, nearly achieving two equal legs up at 1148.30 and almost a 62% retracement (near 1150) of the decline from last week's high. From a bearish perspective, which I still have for gold, it looks like a setup for a stronger selloff to follow. It doesn't turn at least short-term bullish until it can rally above 1170 and in the meantime I continue to look for gold to drop down toward 1000 in the weeks ahead.

Gold continuous contract, GC, Daily chart

There's very little change to silver's weekly chart. While gold was trying a strong bounce off its July 24th low, silver was only able to make it back up to its broken uptrend line from November 2014 (which fits as a H&S neckline). The horizontal line of support, near 15.25, also kept getting in the way of the bulls on a weekly closing basis, all of which had me doubting gold's rally potential. When gold pulled back from last week's high silver made a new low below price-level support near 14.65, which is where it's currently struggling to hold on. A rally above its August 21st high at 15.71 would be at least short-term bullish but in the meantime I'm looking for silver to break down and work its way lower to the $12 area, potentially lower.

Silver continuous contract, SI, Weekly chart

I think the low is in for now for oil. The strong rally off Fib support at 38.41 (the August 24th low was 37.75), which is the 127% extension of its previous rally (January-May), looks like the start of at least a bigger bounce. The idea that I've been tracking for a large sideways consolidation pattern into early next year is still possible, especially if the dollar continues to trade sideways. For that pattern I show a bounce back up to about 58.50 and then back down to a higher low. But it's possible we have a completed 5-wave move down from August 2013, which would be a setup for a larger multi-month bounce correction and potentially back up to the $70-75 area before heading back down. In any case I think the short side for oil (except for short-term trades) is the riskier trade. The big bullish divergence on the weekly MACD has been warning bears not to get aggressive on the short side.

Oil continuous contract, CL, Weekly chart

Tomorrow's economic reports include the Challenger Job Cuts report, so another employment report for the Fed to chew on. The big one will of course be the NFP report on Friday. After the opening bell we'll also get the ISM Services report, which is generally stronger than the manufacturing report. It's expected to show a slowdown from July's 60.3 to 58.4 and anything significantly less than that could actually spark a market rally since it would be one more reason for the Fed not to raise rates.

Economic reports and Summary


While many think we have a strong v-bottom reversal off last week's low, which they believe will lead to a continuation of the bull market and new highs this year, I'm not seeing enough evidence to suggest that's going to happen. It of course could happen but I'll want to see some impulsive price action back to the upside and so far I'm seeing corrective price action (3-wave moves, overlapping highs and lows, etc.). The declines are sharp (impulsive) and the bounces are corrective, which keeps me in the company of bears.

The bigger question for me, assuming we've got new lows coming, is how low it could go and how long it will take, which at the moment is not very clear. Slightly different interpretations of the wave counts for the various indexes makes a difference in the projections for how low the market could go and how long it could take. We could get just a test or minor new low and then start a much larger bounce correction into the end of the month or early October, or we could see the market stair-step lower for another couple of weeks before setting up a big bounce into November.

Each leg down to a new low, assuming we'll get it, will have to be considered THE bottom that sets up a multi-week/month bounce correction (I believe we'll only be looking for a correction to the decline before heading much lower) until proven otherwise. The proof will be in the bounce patterns -- as long as we get choppy or 3-wave moves, such as the bounce off last Monday's low and the current one off yesterday's low, we should look for lower prices. If the current bounce off yesterday's low becomes impulsive (5-wave move up), I'll then look to buy the next pullback for at least another leg up.

The whole idea here is that we're into the part of the pattern that requires analysis of each leg to help determine what the next move is likely to be. Don't get married to any positions and instead look to trade quickly in and out. And most of all, don't worry about missing a trade. In this environment you're likely to miss far more than you catch, otherwise you may be getting too aggressive and acting like a gambler instead of a trader.

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

Keene H. Little, CMT

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

New Plays

Building On Relative Strength

by James Brown

Click here to email James Brown


NeuroDerm Ltd. - NDRM - close: 25.71 change: +0.18

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 2, 2015
Time Frame: Exit
Average Daily Volume = 243 thousand
New Positions: Yes, see below

Company Description

Trade Description:
If the market rebound continues then biotech stocks could lead the way. The group was hit hard during the market's recent correction but they have also seen one of the biggest rebounds. NDRM appears to be something of an exception.

Shares of NDRM were not immune to the market's sharp decline on August 24th but they significantly pared their losses on that day. Furthermore NDRM was showing relative strength the several weeks leading up to the market's correction lower. The rest of the biotech industry did not perform so well as they were already correcting lower prior to the market sell-off.

NDRM is based in Israel. Their IPO was November 14th, 2014. The stock initially priced at $10.00 a share. They had a secondary offering in July this year and the stock actually rallied on the news.

The BTK biotech index and the IBB biotech ETF both peaked around July 20th this year. Currently both the IBB and $BTK are down about -13% from their July highs. During that same time frame, while the biotech stocks were falling, shares of NDRM rallied +42%.

According to the company, "NeuroDerm is a clinical-stage pharmaceutical company developing next-generation treatments for central nervous system (CNS) disorders that will make a clinically meaningful difference in patients' lives. NeuroDerm's technology enables new routes of administration for existing drugs that overcome their current deficiencies and achieve enhanced clinical efficacy.

NeuroDerm is the first to develop liquid levodopa (LD), the gold standard treatment for Parkinson's disease, thus enabling for the first time continuous sub-cutaneous (SC) administration of this drug. By overcoming its biggest deficiency - short half life - NeuroDerm's products should transform patients' lives, offering them clinical benefits that can only be obtained today by undergoing highly invasive surgery."

On the company website, if you look at their portfolio, the company says, "NeuroDerm has developed a portfolio of product candidates that addresses major unmet needs in the field of Parkinson's disease and cognition. Specifically in the alleviation of the effects of Parkinson's disease, the company has four product candidates in different stages of development which offer solution for almost every PD patient - from the moderate to the very severe stage of the disease."

Tonight's trade is a bet on NDRM's relative strength. Like many small biotech firms NDRM does not have any sales yet. These small biotech firms tend to be binary trades. You win big or lose big based on the market's perception of the company's potential. Each and every headline regarding clinical trials or FDA approval can send a stock like this soaring or crashing. Investors should consider this an aggressive, higher-risk trade.

The point & figure chart is bullish and forecasting at $42.00 target. Technically NDRM has been able to build on its bullish pattern of higher lows. Shares look like they have been coiling for a breakout past resistance in the $26.00 area. Tonight we are suggesting a trigger to launch small bullish positions at $26.65.

NOTE: The spread on some of NDRM's options are relatively wide. Traders should consider the options a riskier bet.

Trigger @ $26.65

- Suggested Positions -

Buy NDRM stock @ $26.65

- (or for more adventurous traders, try this option) -

Buy the OCT $30 CALL (NDRM151016C30) current ask $0.90
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart:

Intraday Chart:

In Play Updates and Reviews

Big Bounce Soothes The Sting Of Yesterday's Drop

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market produced a very widespread bounce on Wednesday in spite of another down day for Asian markets. Strong gains for big cap technology and biotech stocks helped boost the NASDAQ to a +2.4% gain.

Current Portfolio:

BULLISH Play Updates

Keurig Green Mountain, Inc. - GMCR - close: 56.56 change: +1.46

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: +2.6%
Entry on August 31 at $55.10
Listed on August 29, 2015
Time Frame: Exit prior to earnings in November
Average Daily Volume = 2.6 million
New Positions: see below

09/02/15: Today's +2.6% gain in GMCR almost completely erased yesterday's loss. The stock looks poised to keep going and make a run at the $60 level soon.

Trade Description: August 29, 2015:
When everyone has the same opinion on a stock sometimes shares will move the opposite direction.

It has not been a good year for GMCR. Shares are down -59% year to date and off -65% from its all-time high set on November 18, 2014 ($157.10). After months and months of declines GMCR could be poised for a big bounce.

If you're not familiar with GMCR they are in the consumer goods sector. When they launched their single-serving coffee brewer it changed the coffee world forever.

According to the company, "As a leader in specialty coffee, coffee makers, teas and other beverages, Keurig Green Mountain (Keurig) (GMCR), is recognized for its award-winning beverages, innovative brewing technology, and socially responsible business practices. The Company has inspired consumer passion for its products by revolutionizing beverage preparation at home and in the workplace. Keurig supports local and global communities by investing in sustainably-grown coffee and by its active involvement in a variety of social and environmental projects. By helping consumers drink for themselves, we believe we can brew a better world."

The company is suffering from heavy competition in the single-serving coffee/hot beverage pod business. The consumer market did not react well when GMCR introduced their Keurig 2.0 brewer, which was designed to only work with company-specific pods. They have also suffered multiple delays on introducing their Keurig Kold machine, which is a cold beverage machine similar to Sodastream.

The stock peaked in November 2014 right before its quarterly earnings report. They beat earnings and revenue estimates but management guided lower. GMCR has guided lower every quarter since then.

In February 2015 they reported earnings and revenues that missed estimates (and guided lower). In early May they reported earnings and revenues that missed estimates (and guided lower). On May 15th the stock sank after the company's presentation on its new Keurig Kold machine. Wall Street is worried that GMCR is pricing their Kold machine too high (around $300) when rival Sodastream's cold beverage maker is only $99.

GMCR's most recent earnings report was August 5th. They reported Q3 earnings of $0.80 per share, which actually beat estimates by a penny but revenues were down -5.2% to $970 million, which was a miss. Management lowered their Q4 guidance. The company said brewer machine sales were down -26%.

Management tried to soften the blow of this disappointing quarterly report and lowered guidance by announcing a $1 billion stock buyback program. The stock collapsed anyway with a plunge from $75 to $52.65.

Everything looks bearish for GMCR. So why are we suggesting a bullish trade? Basically GMCR's stock is so oversold that when it bounces it could see a big bounce. Wall Street analysts have been downgrading GMCR's stock and lowering price targets for the last several months. Everyone is so bearish that an unexpected rally could spark some serious short covering.

When the market collapsed on Monday, August 24th, GMCR fell from $50 to $45.25 but ended the day at $$51.30. That's right. GMCR actually ended Monday with a gain. Shares are now up five days in a row. The $55.00-56.00 area is resistance but a breakout could spark a rally toward $60-65 or its simple 50-dma (currently near $66.50). Technically, last week's bounce, has produced a bullish engulfing candlestick reversal pattern on GMCR's weekly chart. This pattern needs to see confirmation and we want to be ready if this rebound continues.

Friday's high was $54.46. Thursday's high was $54.61. Tonight we are suggesting a trigger to launch bullish positions at $55.10. More aggressive traders might want to consider jumping in early around the $54.75 area. GMCR can be very volatile. I do consider this an aggressive, higher-risk trade.

*small positions to limit risk* - Suggested Positions -

Long GMCR stock @ $55.10

- (or for more adventurous traders, try this option) -

Long NOV $60 CALL (GMCR151120K60) entry $3.07

08/31/15 triggered @ $55.10
Option Format: symbol-year-month-day-call-strike

NuVasive, Inc. - NUVA - close: 52.15 change: +0.14

Stop Loss: 49.85
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 29, 2015
Time Frame: Exit 6 to 8 weeks (option traders exit prior to expiration)
Average Daily Volume = 592 thousand
New Positions: Yes, see below

09/02/15: Our NUVA play is not open yet. The recent performance has not been very inspiring. Shares only rose +0.26% today while the S&P 500 rallied +1.8% and the NASDAQ surged +2.45%.

At the moment our suggested entry point is $54.55 but if NUVA doesn't show some strength soon we'll probably drop it.

Trade Description: August 29, 2015:
Investors want to see earnings growth and NUVA has delivered. The company's bullish results have helped fuel a +14% gain year to date. The NASDAQ composite is only up +1.9%. Traders were quick to buy the dip when the market crashed a few days ago and shares look poised to run.

NUVA is in the healthcare sector. They're part of the medical device industry. According to the company, "NuVasive is an innovative global medical device company that is changing spine surgery with minimally disruptive surgical products and procedurally-integrated solutions for the spine. The Company is the third largest player in the $9.0 billion global spine market. NuVasive offers a comprehensive spine portfolio of more than 90 unique products developed to improve spine surgery and patient outcomes. The Company's principal procedural solution is its Maximum Access Surgery, or MAS®, platform for lateral spine fusion. MAS was designed to provide safer, reproducible, and clinically proven outcomes, and is a highly differentiated solution with fully integrated neuromonitoring, customizable exposure, and a broad offering of application-specific implants and fixation devices designed to address a variety of pathologies."

NUVA has reported strong growth and offered a bullish outlook this year. Starting in January 2015 NUVA raised its full year guidance. They reported earnings on February 24th and beat estimates. They guided higher again on April 1st. Their earnings report on May 4th beat estimates on both the top and bottom line and management raised their 2015 guidance. That pattern repeated with their July 28th earnings report. NUVA beat estimates on both the top and bottom line. The company raised their 2015 estimates above Wall Street expectations. The stock soared to new multi-year highs on this news.

NUVA started to see some profit taking in early August. When the market collapsed a few days ago shares spiked down to $48.00. This was a -14% correction from its early August high. Traders bought the dip and NUVA is up four days in a row. The point & figure chart is bullish and forecasting at $63.00 target.

Tonight we are suggesting a trigger to open bullish positions at $54.55. This would be a new two-week high. We will start this play with a stop loss at $49.85.

Trigger @ $54.55

- Suggested Positions -

Buy NUVA stock @ $54.55

- (or for more adventurous traders, try this option) -

Buy the OCT $55 CALL (NUVA151016C55)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Oshkosh Corp. - OSK - close: 40.86 change: +0.07

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: -3.4%
Entry on August 31 at $42.30
Listed on August 27, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.1 million
New Positions: see below

09/02/15: OSK pierced support at the $40.00 level but bounced off its simple 50-dma near $39.80 this morning. Unfortunately the rebound only made it to +0.1% gain on the session.

I am not suggesting new positions at this time.

Trade Description: August 27, 2015:
The future looks a little brighter for OSK after a big contract win from the U.S. military. OSK has been making vehicles for the military for over 90 years. Earlier this year (January) the military tested new prototypes for a new Humvee design from the likes of Lockheed Martin, AM General, and OSK. This week the Wall Street Journal reported that OSK had won the contract.

OSK is in the consumer goods sector. According to the company, "Oshkosh Corporation is a leading designer, manufacturer and marketer of a broad range of specialty access equipment, commercial, fire & emergency and military vehicles and vehicle bodies. Oshkosh Corporation manufactures, distributes and services products under the brands of Oshkosh®, JLG®, Pierce®, McNeilus®, Jerr-Dan®, Frontline®, CON-E-CO®, London® and IMT®. Oshkosh products are valued worldwide in businesses where high quality, superior performance, rugged reliability and long-term value are paramount."

The new Humvee contract is a big deal. The Pentagon has been cutting back on spending the last few years. This new contract could last 25 years. OSK won with its design that is lighter in weight, providers greater range, and better protection against mines and roadside bombs. Officially the vehicle is called a Joint Light Tactical Vehicle (JLTV).

The initial contract is valued at $6.75 billion for 17,000 vehicles. It could be extended out to year 2040 since the U.S. army wants to buy almost 50,000 new JLTVs for itself and about 5,500 for the Marines. The overall program could be worth $30 billion over 25 years.

OSK's revenues last year were only $6.2 billion so this is a nice boost.

Technically shares of OSK appear to have produced a bullish double bottom. The stock market's spike lower on Monday morning pushed OSK toward its late July lows. This week's rebound in the market has seen OSK breakout past resistance near $40.00 and its 50-dma. This reversal higher has produced a new buy signal on the point & figure chart, which is forecasting a long-term $63.00 target.

Today's high was $42.21. Tonight we are suggesting a trigger to launch bullish positions at $42.30.

- Suggested Positions -

Long OSK stock @ $42.30

- (or for more adventurous traders, try this option) -

Long 2016 Jan $45 CALL (OSK160115C45) entry $3.30

08/31/15 triggered @ $42.30
Option Format: symbol-year-month-day-call-strike

Starbucks - SBUX - close: 55.26 change: +1.76

Stop Loss: 51.15
Target(s): To Be Determined
Current Gain/Loss: +0.2%
Entry on August 27 at $55.15
Listed on August 25, 2015
Time Frame: Exit prior to earnings in October
Average Daily Volume = 8.0 million
New Positions: see below

09/02/15: SBUX delivered big gains today. Traders bought the dip at $53.75 (near the 10-dma) and shares rebounded back toward the $55 level. By the closing bell SBUX was up +3.28%. The next challenge for the bulls is the 50-dma near $55.65 and last week's high at $56.31.

No new positions at this time.

Trade Description: August 25, 2015:
The sell-off in shares of SBUX is a bit ridiculous. The Thursday-Friday-Monday sell-off in the market saw SBUX fall from $57.59 to $42.05. That was a -27% drop in less than three days. The company's fundamentals didn't deteriorate -27%. The recent market turmoil presents an opportunity to buy SBUX. Jump to the bottom of this play description for details.

Here's a little bit about SBUX and the company's performance:

The world seems to have an insatiable appetite for coffee. Starbucks is more than happy to help fill that need. The first Starbucks opened in Seattle back in 1971. Today they are a global brand with locations in 66 countries. SBUX operates more than 21,000 retail stores with more than 300,000 workers.

A few years ago Business Insider published some facts on SBUX. The average SBUX customer stops by six times a month. The really loyal, top 20% of customers, come in 16 times a month. There are nearly 90,000 potential drink combinations at your local Starbucks. The company spends more money on healthcare for its employees than it does on coffee beans.

The company's earnings results were only mediocre most of 2014 year. You can see the results in SBUX's long-term chart below. After incredible gains in 2013 SBUX has essentially consolidated sideways in 2014. SBUX broke out of that sideways funk after it reported earnings in January 2015.

Five-Year Plan

In late 2014 SBUX announced their five-year plan to increase profitability. Here's an excerpt from a company press release:

"The seismic shift in consumer behavior underway presents tremendous opportunity for businesses the world over that are prepared and positioned to seize it," Schultz said (Howard Schultz is the Founder, Chairman, President, and CEO of Starbucks). "Over the next five years, Starbucks will continue to lean into this new era by innovating in transformational ways across coffee, tea and retail, elevating our customer and partner experiences, continuing to extend our leadership position in digital and mobile technologies, and unlocking new markets, channels and formats around the world. Investing in our coffee, our people and the communities we serve will remain at our core as we continue to redefine the role and responsibility of a public company in today's disruptive global consumer, economic and retail environments."

"Starbucks business, operations and growth trajectory around the world have never been stronger, and we are more confident than ever in our ability to continue to drive significant growth and meet our long term financial targets," said Troy Alstead, Starbucks chief operating officer. "We have more customers visiting more stores more frequently, both in the U.S. and around the world, than at any time in our history. And we expect both the number of customers visiting our stores and the amount they spend with us to accelerate in the years ahead. With a robust pipeline of mobile commerce innovations that will drive transactions and unprecedented speed of service, Starbucks is ushering in a new era of customer convenience. We believe the runway of opportunity for Starbucks inside and outside of our stores is both vast and unmatched by any other retailer on the planet."

The company believes they can grow revenues from $16 billion in FY2014 to almost $30 billion by FY2019. To do that they will expand deeper into regions like China, Japan, India, and Brazil. SBUX expects to nearly double its stores in China to over 3,000 locations in the next five years

They're also working hard on their mobile ordering technology to speed up the experience so customers don't have to wait in line so long at their busiest locations. This will also include a delivery service.

Part of the five-year plan is a new marketing campaign called Starbucks Evening experience. The company wants to be the "third place" between home and work. After 4:00 p.m. they will start offering alcohol, mainly wine and beer, in addition to new tapas-like smaller plates.

The company recently launched its first ever Starbucks Reserve Roastery and Tasting Room in Seattle, near their iconic first retail store. The new roastery is supposed to be the ultimate coffee lovers experience. CEO Schultz said they will eventually open up about 100 of these Starbucks Reserve locations.

Earnings results:

It was a very strong holiday period for SBUX thanks in part to astonishing gift card sales. The amount of money loaded onto SBUX gift cards during the holidays surged +17% to a record $1.6 billion. One out of every seven Americans received a SBUX gift card. The company also saw significant growth overseas with its China and Asia-Pacific business soaring +85% to sales of $495 million. Their mobile transactions have reached seven million transactions a week.

SBUX reported its Q2 (2015) on April 23rd. Earnings of $0.33 a share were in-line with estimates. Revenues were up +17.8% to $4.56 billion, slightly above expectations. It was their strongest growth in four years. Customers are responding well to new drink options and an updated food menu. They're also developing new delivery options, mobile pay options, and alcoholic drinks available at select locations.

Worldwide same-store sales grew +7%. This was significantly above estimates. It also marked the 21st consecutive quarter where SBUX's comparable store sales were +5% or more.

The company issued mixed guidance. The stronger dollar is having an impact. They see fiscal 2015 results in the $1.55-1.57 range. That compares to Wall Street estimates for $1.57 per share. However, the company's revenue estimates are more optimistic. They're forecasting +16-18% sales growth into the $19.1-19.4 billion zone compares to analysts' estimates of $19.1 billion.

The trend of earnings pops continued in July with shares gapping up to new all-time highs following its Q2 report on July 23rd. Earnings were $0.42 per share, a penny above estimates. Revenues were up +17.5% to $4.88 billion, just a hair above expectations. Global same-store sales were up +7% and their non-GAAP operating margin improved 100 basis points to 19.5%. Management is still guiding 2015 revenues to rise +17% in the $19.1-19.4 billion range.

Recent Sell-off & Entry Point

The recent stock market bloodletting saw SBUX breakdown below a multitude of support levels. The weakness on Monday morning was just ridiculous. SBUX opened on Monday, August 24th near technical support at its 200-dma and then it plunged to $42.05. The stock bounced back to $50 by the closing bell. The rebound struggled today but SBUX displayed relative strength with a +1.48% gain versus a -1.35% drop in the S&P 500 and a -0.4% decline in the NASDAQ.

If the stock market continues to sink we want to take advantage of the weakness in SBUX and launch bullish positions on a dip near its 200-dma. Today the simple 200-dma is at $48.04. We will set our entry trigger at $48.00. We are starting this play without a stop loss. More conservative investors might want to wait on launching positions since the next few days could be volatile for the broader market (SBUX included).

- Suggested Positions -

Long shares of SBUX @ $55.15

- (or for more adventurous traders, try this option) -

Long NOV $57.50 CALL (SBUX151120C57.5) entry $2.00

08/29/15 new stop at $51.15
08/27/15 Triggered @ $55.15
08/26/15 Entry point adjustment - move the buy-the-dip trigger from $48.00 to $50.00. Plus, add a secondary trigger to open bullish positions at $55.15.
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

Lannett Co. - LCI - close: 49.48 change: +2.19

Stop Loss: 51.55
Target(s): To Be Determined
Current Gain/Loss: -6.6%
Entry on September 01 at $46.42
Listed on August 31, 2015
Time Frame: Exit 6 to 8 weeks (ahead of October option expiration)
Average Daily Volume = 858 thousand
New Positions: see below

09/02/15: Warning! Tomorrow morning is going to be really painful for LCI bears.

Shares did not cooperate during the regular session with the stock up +4.6% on no news. The stock was approaching potential round-number resistance at $50.00 by the closing bell.

Then after the closing bell LCI announced it was spending $1.23 billion to buy UCB's Kremers Urban Pharmaceuticals unit. This will effectively double LCI's sales and boost its fiscal 2017 earnings by 20-25%.

Shares of LCI are up +20% after hours. Our trade will be stopped out on the gap open tomorrow morning.

- Suggested Positions -

Short LCI stock @ $47.25

- (or for more adventurous traders, try this option) -

long OCT $45 PUT (LCI151016P45) entry $5.00

09/02/15 After hours LCI announces acquisition, stock surges +20%
09/01/15 triggered on a gap down at $46.42, suggested entry was $47.25
Option Format: symbol-year-month-day-call-strike

QUALCOMM Inc. - QCOM - close: 55.86 change: +0.84

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 1, 2015
Time Frame: 4 to 6 weeks
Average Daily Volume = 12.5 million
New Positions: Yes, see below

09/02/15: QCOM gapped open higher at $55.63 and closed with a +1.5% gain. There is no change from last night's new play description. Our suggested entry point for bearish positions is $54.45.

Trade Description: September 1, 2015:
There seem to be a ton of bulls shouting at everyone to buy QCOM even though the stock is in a bear market. QCOM peaked in early 2014 around $81-82 a share. Since then it has been a very bumpy decline lower.

The company is facing rising competition. More importantly some of that competition is coming from its own customers. QCOM has been a very dominant player in the mobile phone chipset market. Yet lately the company has been facing competition from mobile phone manufacturers choosing to use their own chips instead of QCOM's.

Almost half of QCOM's revenues come from two companies: Apple (AAPL) and Samsung. Both of these mobile phone makers have been slowly beefing up their own in-house chip design and production abilities. Earlier this year QCOM lost out when Samsung picked its own chip sets for a handful of new mobile phone models instead of QCOM's.

The rising competition is taking a bite out of sales. QCOM's earnings performance has been mixed over the last year. It tends to beat estimates on the bottom line but revenues have been disappointing. After a couple of quarters of revenue growth in the +7-8% range QCOM just reported Q3 revenues fell -14.3%, which was worse than expected. Another big challenge is management's guidance. QCOM has lowered its guidance the last four quarterly reports in a row!

The company has tried to soften the bad news by announcing a massive $15 billion stock buyback program but that was back in March this year. They promised to spent $10 billion on buybacks between March 2015 and March 2016. The big buyback has not stopped QCOM's stock from falling to new multi-year lows.

Bullish investors have tried to argue that QCOM might split up the company to unlock value. That was a very popular idea when activist investors Jana Partners got involved in QCOM. Jana is one of the reasons QCOM did such a big stock buyback earlier this year.

Right now the market's focus on China's weakness could be killing QCOM's stock. The company does a huge amount of business with China.

Meanwhile technically QCOM looks very weak. The point & figure chart is bearish and forecasting at $48.00 target. The oversold bounce from last week's lows appears to be rolling over. Today's intraday low was $54.69. We are suggesting a trigger to launch bearish positions at $54.45. We'll plan on exiting in the next four to six weeks.

Please note that I do want to offer one potential warning. Apple Inc. (AAPL) has a special event scheduled for September 9th. We do not know what AAPL will announce. If they happen to announce something that uses QCOM equipment then it could be a bullish catalyst for QCOM but that's probably a big "if" at the moment.

Trigger @ $54.45

- Suggested Positions -

Short QCOM stock @ $54.45

- (or for more adventurous traders, try this option) -

Buy the OCT $50 PUT (QCOM151016P50)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

iPath S&P500 VIX Futures ETN - VXX - close: 27.47 change: -3.29

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: -25.9%
2nd position Gain/Loss: +5.3%
Entry on August 25 at $21.82
2nd position: September 2nd at $29.01
Listed on August 24, 2015
Time Frame: Exit prior to October option expiration
Average Daily Volume = 50 million
New Positions: see below

09/02/15: The market's widespread bounce today sparked a big reversal lower in volatility. The VXX gapped down at $29.01 and then plunged to a -10.6% decline.

Our plan was to double down on positions at the opening bell this morning.

No new positions at this time.

Trade Description: August 24, 2015
The U.S. stock market's sell-off in the last three days has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on this long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

(see VIX chart from the August 24th play description)

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet. Our time frame is two or three weeks (or less).

- Suggested Positions -

Short the VXX @ $21.82

- (or for more adventurous traders, try this option) -

Long OCT $20 PUT (VXX151016P20) entry $2.93

Sept. 2nd - 2nd position (Double Down On The September 1st Spike)

Short the VXX @ $29.01

- (or for more adventurous traders, try this option) -

Long OCT $20 PUT (VXX151016P20) entry $0.78

09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82
Option Format: symbol-year-month-day-call-strike