Option Investor

Daily Newsletter, Wednesday, 12/23/2015

Table of Contents

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

Market Wrap

Ho-Ho-Ho, Merry Christmas

by Keene Little

Click here to email Keene Little
Santa might have been late to the party but he showed up this week with lots of goodies and toys for the bulls. Suddenly it's looking like the bears will be the ones with lumps of coal in their stockings. There is some concern about what happens after Christmas but right now bulls are happy.

Today's Market Stats

By the end of the day last Friday it wasn't looking like the bulls were going to get anything but lumps of coal in their stockings. With the market struggling on Monday it wasn't looking much better but then a late-afternoon rally was followed by a strong rally on Tuesday and another one today. Now it's the bears who look like they've been forced to trade their goodies-filled stockings for the bull's lump of coal.

With this week's rally SPX has made it back into positive territory for the year (+0.3%). It needs to close above 2058.90 to make it a positive year and avoid the dreaded down year for what is typically a positive year (3rd year of a president's 2nd term). This has been a year the bulls have struggled to get the market higher. Of course it's been a struggle for the bears to break it down, which under normal circumstances (without the Fed's and government's involvement), would not have been too difficult. From a fundamental perspective we have a market that is trying to hold up in the face of a struggling global economy that is dragging the U.S. economy down with it.

If the market holds up into the end of the year (lots of helping hands to make that happen), we have to seriously wonder what will happen in January. Many fund managers would probably be happy to see a strong selloff so that they can pick up inventory cheaper and have a good chance at making money with an expected rally in the coming year. At least that's what many seem to believe. I think 2016 will be a strong year for the bears instead of the bulls but obviously neither side can know how the year will go. But considering the many signs of a global economy that's in trouble, it's hard to justify why the stock market should continue to rally.

Today's rally got a good start from an overnight rally in the futures, which has been true each day this week. There's an effort to get the market to rally and it's easier to manipulate the futures market. With a lack of sellers, like yesterday, the buyers were able to slowly move the market higher throughout the day with only minor profit taking along the way. As I'll show on the charts, the indexes have now been pushed up into resistance but with the lighter-than-normal trading volume and the helping hand with the overnight futures, we could see another gap up tomorrow and an attempt to get the indexes to close as high as possible in front of the holiday weekend. But bulls run the risk of profit taking during tomorrow's half-day session as traders might want to get flat in front of a long weekend since there's still worry about potential terrorist activity.

There are a few cycle studies, including Fibonacci time ratios, which point to December 22-25 as a potentially important turn window. These turn windows can't predict which way the market will turn but it's usually a reversal of whatever the market is doing into the turn. With this week's rally it could mean we'll see a reversal back down next week, which is another reason to be cautious about the upside from here, especially since there's a possible nasty bearish pattern that could play out in the coming weeks (I'll get into it with the charts). It's been a good week for the bulls and it could continue through next week's lower-than-usual trading volume, but I'd rather wait until Monday before looking at bullish opportunities. I think protection of positions for over the weekend is the more prudent thing to do here. Having a few short positions is not a bad idea.

Today's economic reports had no effect on the market. Personal income and spending were in line with expectations -- +0.3%. Income was down from +0.4% in October while spending in November was up from 0.0%.

Durable goods orders were flat in November, down from +2.9% in October but better than the expected -0.7%. Ex-transportation orders, the number was -0.1%, a little worse than the expected 0.0% and a drop from +0.5%. It's another sign of a slowing economy, which is reflected in the poor performance of transport stocks.

Michigan sentiment ticked higher in December, likely related to the holidays, with a reading of 92.6 and an improvement from November's 91.8. New home sales were up slightly in November, hitting 490K, but October's sales were revised lower from 495K to 470K and it came in less than the 505K expected so it was actually not that great. Following yesterday's disappointing existing home sales, it's another sign of a slowing economy.

Moving to the charts, I'm continuing to track on the SPX weekly chart the intermediate bullish idea for a rising wedge pattern for the rally off the August low. As depicted in green on the chart, we could see SPX work its way higher into April and up to the 2200 area. In doing so it would also achieve the price projection at 2170, which is where the 2nd leg of the 3-wave move up from 2009 would equal 162% of the 1st leg up. I have a hard time believing this market can hold up that long but it's already held up far longer than I thought it would. Just look at the separation between commodities, which peaked in 2011, and the stock market and you get an idea how long this craziness can continue. So while I respect the upside potential I am concerned about a short-term pattern for the decline from November, which suggests the next leg down is going to be a scary one for bulls. Combining the scary bearish pattern with the December 22-25 turn window has me seriously wondering if we're going to get a downside break next week.

S&P 500, SPX, Weekly chart

The daily chart shows this week's rally has taken SPX up to its downtrend line from December 2-16, currently near today's high at 2064.73. It's also back up to its nest of 20-, 50- and 200-dmas, located at about 2056-2061, as well as its 50-week MA near 2061. That makes for a lot of resistance in this area and while a low-volume environment makes it easier for a big fund to push it over the line, there could be enough concerns by investors to not want to push their luck over this holiday period, considering the terrorist threats. Profit taking during Thursday's half-day session could have resistance holding. But if the buying can continue through next week there is the potential for a rally up to the 2120 area by year-end, which is where it would again run into its broken uptrend line from October 2011 - October 2014.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2090
- bearish below 1993

The 60-min chart below shows one other short-term bullish possibility -- we could see a rally up to a price projection near 2089 where the bounce off December 14th low would have two equal legs for an a-b-c bounce correction before heading lower. If SPX can hold above 2065 I'd look for 2089, potentially higher, but the first thing the bulls need to accomplish is getting SPX to close above 2065 for the week.

S&P 500, SPX, 60-min chart

The S&P 500 (OEX) is very similar to SPX but this index's options tend to be used more by "smart" money traders and there was an interesting article in MarketWatch.com yesterday that showed the chart below. This looks at the Put/Call ratio and identifies those times when puts outnumbered calls by 2-to-1 (red horizontal dotted line). This is typically a sign of excessive bearishness and a reason to be a contrarian and look to fade the traders (do the opposite). But notice how the high P/C ratios tended to precede tops in the stock market, not bottoms as you'd expect to see from a contrarian perspective. The reason is smart money sees what's happening and starts betting on a top and they're more often right than wrong. The alarming signal here is that the P/C ratio has recently topped 3-to-1 and is the first time EVER in doing so. This is either an incredibly strong warning signal for bulls to get out of the way or else a lot of smart traders have suddenly gone stupid.

S&P 100, OEX, Weekly chart, 1999-present, chart courtesy marketwatch.com

The DOW looks like SPX in that it too has rallied up to its nest of 20-, 50- and 200-dmas and also closed slightly above them at about 17540-17580. The bulls would like to see something better than the 1-day rally above the moving averages on December 16th, which was followed by two strong days of selling. At the moment we have a 3-day rally, the same as the 3-day rally into the December 16th high. A close above 17580 on Thursday would be more bullish and it would suggest we might see a rally to at least its downtrend line from May-November, near 17860, and perhaps back up to its broken uptrend line from October 2011 - October 2014, near 18K next week. But like SPX, the series of lower highs could lead to a strong breakdown next week and upside potential is again dwarfed by downside risk.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,950
- bearish below 17,050

NDX has also rallied up to its 20- and 50-dma's, near 4630 and 4618, resp. (its 200-dma is still below), closing between them today. This week's rally in the techs has been primarily from overnight rallies in the futures, creating gaps to the upside each of the last three days, but the techs have been acting weaker than the blue chips, which is somewhat defensive for the market. If the buying can get at least a little stronger I see the potential for a move up to a price projection at 4820 by early January. But downside risk becomes much greater if it too breaks below Monday's low near 4513.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4740
- bearish below 4513

The RUT has bounced back up to price-level S/R near 1152 and is a little shy of its 20-dma, near 1158, and its 50-dma, near 1164. Looking back a little further at its pattern, it's possible a 3-wave pullback from its November 6th high completed with the impulsive December 2-16 decline. That pattern suggests the RUT is just getting started in a new rally leg, one which will take it above its December 2nd high at 1205. A rally above 1168 would open the door to that potential. But the bearish interpretation of the pattern is that the December 2-16 decline is a 1st wave and the 3-wave bounce off the December 16th low is a correction to the decline. Two equal legs up for an a-b-c bounce correction points to 1163 and that remains short-term bullish potential. But the minimum requirement for the bounce has been met and it could turn back down at any time. A failure to close above 1152 on Thursday would be a potentially bearish setup in front of next week.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1168
- bearish below 1120

I think the most surprising thing to happen after the FOMC announced the rate increase is that bonds have done nothing. The Fed is threatening to raise rates at least a full point in 2016 (4 x .25%) and that should be sending bond prices lower (yields higher). But following the FOMC announcement bond prices actually rallied, which of course dropped yields and it's as if the bond market was blowing a big raspberry at the Fed, as if saying "we don't believe you'll be able to raise rates any further and in fact raising this time was likely a mistake." Using TLT (20+ year Treasury Bond ETF), price rallied and then pulled back this week, as the stock market rallied, and is now essentially at the same place as it was pre-FOMC.

The message from the bond market is certainly not clear at the moment, considering it has chopped sideways in a tightening range all year. The sideways triangle in which TLT has been trading this year fits as a bullish continuation pattern following the 2014 rally and while I show a little more pullback to complete the pattern, it would become bullish sooner if it breaks above it December 11th high at 124.10. But the bullish pattern would be negated with a drop below the November 9th low at 118.

20+ Year Treasury ETF, TLT, Daily chart

Following the FOMC rate hike last week we were supposed to get a strong rally in the U.S. dollar. Apparently dollar bulls failed to get the memo. After a brief short-covering rally the day after the FOMC announcement the dollar has pulled back and is trading near where it was before the announcement. Its weakness further supports the idea we'll get another pullback to the bottom of the trading range it's been since the March high. A more bullish possibility calls for a minor new high followed by a pullback and then onto new highs in the coming year (light green dashed line). While I am bullish the dollar longer term I think we'll see a larger consolidation pattern before it starts the next rally leg.

U.S. Dollar contract, DX, Weekly chart

Gold too has not moved much since the FOMC announcement. It did sell off the day after the FOMC announcement but then rallied right back up. A pullback yesterday and today is expected to be followed by a continuation of the bounce off its December 3rd low. How high the bounce might get is the big question and since I believe we'll see lower prices for gold, I think we'll get just a bounce correction into January and then start back down. Upside targets are 1118 and then 1142 and assuming we'll get a higher bounce I'll then be able to update the price targets to watch for.

Gold continuous contract, GC, Weekly chart

Oil looks like it might finally be ready for a rally and today's +4.8% rally gave it a nice boost. It is now testing the top of a bullish descending wedge that developed for the decline following the October 9th high. At the same level is its 20-dma, now near 38. It could pull back a little before heading higher and assuming it will head higher, the next question is what kind of rally to expect. A larger descending wedge for the decline following the June high calls for another leg down following a choppy bounce up to the top of it, perhaps around 41 by the end of January (light red dashed line on the daily chart below). The more bullish potential is for a stronger rally that will break above the key level for the bulls at 43.50 and it's a rally that could then take oil back up to stronger resistance near 60.

Oil continuous contract, CL, Daily chart

A chart that Tom McClellan shared with me is shown below -- it's a longer-term monthly chart starting back in 1892 and as you can see, the current decline has brought it down to price-level S/R near 35, shown by the red line on the chart below. It's hard to believe $35 was considered an extreme high for 25 years prior to the rally in 2004. It's a good place to expect at least a bounce, especially with the setup on the shorter-term pattern on the daily chart above. But keep in mind that there's more downside potential for oil if it's to drop back down to the bottom of its up-channel in the coming year. It's currently near 22.80 and in another year it will only have made it up another dollar to about 23.80.

Oil monthly chart, 1892-present, chart courtesy mcoscillator.com

Another chart from McClellan is shown below -- this time oil is priced in gold and as you can see, it's back down to support seen multiple times since about 1900. These longer-term patterns, combined with the shorter-term pattern, suggests now is not the time to be pressing bets to the downside for oil.

Oil priced in gold, Monthly chart, 1892-present, chart courtesy mcoscillator.com

Economic reports


Bulls finally got their Santa Claus rally (better late than never) but they'll need to do better if they want to avoid yet another lower high in the series of them since this month. This week's low volume and lack of selling, with strong assistance from overnight rallies in the futures, helped lift the indexes back up. But they've now run into resistance and it's going to be important how the indexes close tomorrow. With very light volume it's hard to judge a move but at least a close above today's closing prices would keep things potentially bullish for next week.

From a time perspective, it's not a good time to complacently expect the market to continue higher. We're now inside an important turn window, December 22-25, which includes a full moon on December 25th. Some astrologer friends tell me December 25th is also a very important "change" date. These are things that make me sit up and pay attention. We're rallying into the turn window (or was Monday's low a decline into the window, hitting it early?) and that has me on alert to the possibility that the market will reverse hard down next week. The bearish pattern, with the series of lower highs, suggests a strong decline to follow and all it needs is a catalyst to start the snowball rolling downhill.

As mentioned before, I see upside potential dwarfed by downside risk, especially considering the price pattern and the turn window. At least be safely positioned into next week and if the rally can continue we'll look for the additional upside targets. But getting into a few put positions, for either speculation or hedging, is not a bad idea here.

Also not a bad idea is to make sure you've re-upped for another year of OIN.

Annual End of Year Subscription Special

It is that time of year again when we offer the best prices of the year on a package of our top newsletters. If you have been a subscriber for several years you know this is the best price and best deal of the year.

Please follow the link below to see for yourself the EOY subscription special for 2016. You will not be disappointed!

To our many subscribers, thank you for your support and we obviously could not do what we do if we did not have loyal readers like you. I wish you the happiest Christmas holiday and good times with friends and family. Stay safe, be careful on the roads and most of all remember that we trade for a living (or to supplement our income and/or build a retirement nest egg) but we should not be living to trade. Enjoy the good times and if you're struggling, keep moving until you're not. Have a great weekend 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

Markets Bounce Just In Time For Christmas

by James Brown

Click here to email James Brown

Editor's Note:

No new trades tonight.

Tomorrow is Christmas Eve. The U.S. stock market will close early (1:00 pm ET). Volume will be very, very light as most traders are off on holiday. Sometimes super low volume can produce volatile market moves. The good news is that history suggests stocks will rally between now and yearend.

According to the research team with the Stock Trader's Almanac, the Santa Claus rally normally starts tomorrow and runs through the first day or two of the new year. The three trading days after Christmas are some of the most bullish days of the year for stocks.

Please note there will be no newsletter tomorrow night (Christmas Eve). We will return with our normal newsletter this weekend.

Merry Christmas and Happy Holidays!

In Play Updates and Reviews

Oil's Rebound Fuels Another Rally Ahead Of Christmas

by James Brown

Click here to email James Brown

Editor's Note:
Crude oil was a big mover today. The commodity's big bounce generated sharp rallies across most of the energy-related stocks. There was also a "dash-for-trash" as traders snapped up unloved stocks.

What is a "dash-for-trash". Traditionally it is when investors buy junk or low-quality stocks with no fear of the fundamentals, especially after the group has been crushed to new lows. Today's action in the U.S. stock market seemed to mimic this sort of mentality.

A lot of beaten down equities saw big bounces today. Tax-loss selling tends to happen in mid-December. Thus must of the tax-loss selling should be completed by now. Nimble traders could see some of the beaten down stocks as short-term buying opportunities since most of the sellers are already out. At least that was the theory being tossed around today. Some of our bearish candidates definitely saw some bounces in today's session.

CTRP has been removed. WDC hit our new stop loss.

Current Portfolio:

BULLISH Play Updates

Activision Blizzard, Inc. - ATVI - close: 38.84 change: -0.37

Stop Loss: 36.90
Target(s): To Be Determined
Current Gain/Loss: +1.8%
Entry on December 04 at $38.15
Listed on December 03, 2015
Time Frame: Exit prior to ATVI earnings in early February
Average Daily Volume = 10.0 million
New Positions: Yes, see below

12/23/15: Ouch! It was a rough day for ATVI shares. The stock hit some profit taking this morning and by lunchtime ATVI was down -4% on the session. Fortunately investors bought the dip near ATVI's bullish trend of higher lows. Shares pared their loss to -0.9% by the close. Tonight we are raising the stop loss to $36.90.

No new positions at this time.

Trade Description: December 3, 2015
The movie industry gets a lot of press but the video game market is much bigger. One of the biggest companies in this arena is ATVI and they're about to get a lot bigger.

ATVI is part of the technology sector. According to the company, "Activision Blizzard, Inc. is the largest and most profitable western interactive entertainment publishing company. It develops and publishes some of the most successful and beloved entertainment franchises in any medium, including Call of Duty, Call of Duty Online, Destiny, Skylanders, World of Warcraft, StarCraft®, Diablo®, and Hearthstone. Headquartered in Santa Monica, California, it maintains operations throughout the United States, Europe, and Asia. Activision Blizzard develops and publishes games on all leading interactive platforms and its games are available in most countries around the world."

Revenues for a video game company like ATVI tend to be lumpy based on new releases throughout the year. The company has managed to beat Wall Street's estimates on the bottom line the last four quarters in a row.

On November 2nd, 2015, ATVI announced they had signed a $5.9 billion deal to buy King Digital Entertainment (symbol: KING). This deal should give ATVI a huge boost in its mobile gaming footprint and could add a significant chunk to earnings in 2016. A Wedbush analyst believes the mobile gaming market is about $24 billion and growing at up to 20% a year for the next five years. They see the KING acquisition as a great fit for ATVI.

Several days later, on November 11th, ATVI announced that their new Call of Duty: Black Ops III game was the biggest entertainment launch of the year with a three-day opening weekend sales above $550 million. That surpassed any other entertainment launch of the year including books, music, or movies (surpassing the movie Jurassic World's massive opening weekend).

Recently a Cowen analyst said videogames are going to be another hot seller this year and they listed ATVI as their top pick in the industry. Multiple analysts have upgraded their stock price on ATVI following the KING acquisition news. Shares of ATVI have shown significant strength this year. The stock is trading at all-time highs and up +86% year to date. The point & figure chart is bullish and forecasting at $49.50 target.

Today's widespread market decline sparked some profit taking in ATVI. The stock found support at its rising 10-dma. If shares bounce from here we want to jump on board. Tonight we are suggesting a trigger to launch bullish positions at $38.15.

- Suggested Positions -

Long ATVI stock @ $38.15

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

Long FEB $40 CALL (ATVI160219C40) entry $1.47

12/23/15 new stop @ 36.90
12/04/15 triggered @ $38.15
Option Format: symbol-year-month-day-call-strike

Cynosure, Inc. - CYNO - close: 42.91 change: -0.31

Stop Loss: 39.90
Target(s): To Be Determined
Current Gain/Loss: -1.5%
Entry on December 23 at $43.55
Listed on December 22, 2015
Time Frame: Exit PRIOR to earnings in February
Average Daily Volume = 214 thousand
New Positions: see below

12/23/15: Our new bullish trade on CYNO is open. The stock was volatile at the opening bell. CYNO opened at $43.37 and then plunged to $41.57 and bounced back to $43.07 all in the first 60 seconds of trading. The stock managed to tag our suggested entry point at $43.55 intraday before settling with a -0.7% decline on the session.

At this time I would wait for a new rally past $43.50 or consider waiting for a rally past today's intraday high (43.72) before initiating positions.

Trade Description: December 22, 2015:
CYNO has a product for the narcissist in all of us. Their products and services can help revitalize the skin, remove scars, remove hair, remove tattoos, treat cellulite and body contouring. Naturally business is booming in the United States.

CYNO is part of the healthcare sector. According to the company, "Cynosure develops, manufactures, and markets aesthetic treatment systems that enable plastic surgeons, dermatologists and other medical practitioners to perform non-invasive and minimally invasive procedures to remove hair, treat vascular and benign pigmented lesions, remove multi-colored tattoos, revitalize the skin, reduce fat through non-invasive and minimally invasive laser lipolysis, reduce cellulite, clear nails infected by toe fungus, ablate sweat glands and improve vaginal health. Cynosure also markets radiofrequency energy-sourced medical devices for precision surgical applications such as facial plastic and general surgery, gynecology, ear, nose, and throat procedures, ophthalmology, oral and maxillofacial surgery, podiatry and proctology. Cynosure's product portfolio is composed of a broad range of energy sources including Alexandrite, diode, Nd:YAG, picosecond, pulse dye, Q-switched lasers, intense pulsed light and radiofrequency technology. Cynosure sells its products globally under the Cynosure, Palomar, ConBio and Ellman brand names through a direct sales force in the United States, Canada, Mexico, France, Morocco, Germany, Spain, the United Kingdom, Australia, China, Japan and Korea, and through international distributors in approximately 120 other countries."

The company was able to grow at more than 30% a year for several years. That growth has slowed down somewhat but they are still seeing significant growth. CYNO has beaten Wall Street's earnings and revenue estimates the last three quarters in a row. Their most recently quarterly report was October 27th. CYNO announced their Q3 results. Earnings were $0.21 a share with revenues rising +9.7% to $78.4 million. That beat expectations of $0.17 a share on revenues of $76.6 million. The results were driven by a +29% jump in North American revenues.

CEO Michael Davin commented on his company's quarter, "Continued momentum in North America drove another quarter of strong top-line growth and increased gross margin for Cynosure. Product revenue in North America was up 29 percent year-over-year to $40.8 million, or 63 percent of total product revenue for the quarter, on strong sales of the PicoSure, Icon and MonaLisa Touch product lines... As we discussed during our September 15th Investor Day, the U.S. pre-launch release of SculpSure, our new hyperthermic laser system for non-invasive fat reduction, is underway... We enter our seasonally strongest quarter with solid momentum. Looking ahead, the full U.S. launch of SculpSure is on schedule for the first quarter of 2016, which is planned to coincide with the rollout of the product to our European direct offices in France, Germany, Spain and the United Kingdom as well as our direct office in Australia. Key objectives for SculpSure for the year ahead include: securing additional international registrations, gaining expanded clearances for treatment areas in addition to the flanks and abdomen, pursuing aesthetic indications beyond non-invasive fat reduction and adding new distribution channels."

Shares of CYNO surged on its earnings results. Since then investors have been buying the dips that eventually pushed the stock up toward its all-time highs in the $42.00-43.00 area. Today shares got a boost from an analyst who reiterated their bullish outlook and raised the price target to $52.00. This helped CYNO outperform the major indices with a +3.0% gain and a breakout to new all-time highs.

Technically the trend is bullish. The breakout past resistance in the $42.00 area is also bullish. The point & figure chart is forecasting at long-term $66.00 target. Tonight we are suggesting a trigger to launch positions at $43.55. I am suggesting small positions to limit risk. CYNO does not see a lot of daily trading volume. I will also point out that CYNO does have options but the spreads look too wide to trade so we'll stick to just the stock.

*small positions to limit risk* - Suggested Positions -

Long CYNO stock @ $43.55

12/23/15 triggered @ $43.55

iShares Russell 2000 ETF - IWM - close: 114.78 change: +1.43

Stop Loss: 111.45
Target(s): To Be Determined
Current Gain/Loss: +1.9%
Entry on December 15 at $112.65
Listed on December 12, 2015
Time Frame: 4 to 8 weeks
Option traders: exit prior to January option expiration
Average Daily Volume = 36 million
New Positions: see below

12/23/15: The market rally accelerated on Wednesday and the IWM added +1.26%. This ETF is now challenging recent resistance near the $115.00 level.

No new positions at this time.

Trade Description: December 12, 2015:
Stocks were hammered last week. The small caps really underperformed with the Russell 2000 small cap index plunging 60 points or -5%. The last two weeks have seen an 80-point drop (-6.7%) in the $RUT.

Last week's sell-off looks pretty ugly especially with Friday's breakdown below short-term support near 1,140 on the $RUT index. We think the weakness is overdone.

Normally the middle of December sees some tax-loss selling ahead of yearend. Last week the tax-loss selling was exacerbated by serious weakness in crude oil. Oil's plunge to new seven-year lows crushed the energy sector. There is also some general uneasiness about the Fed's likely decision to raise rates in the week ahead.

Historically the mid-December dip is a buying opportunity. The next two or three weeks is typically bullish and small caps often outperform. We want to be ready if that happens. One way to play the small caps is the Russell 2000 ETF, the IWM.

Friday saw the IWM sink -2.2% to close at $111.91. Tonight we are suggesting a trigger to launch bullish positions at $112.65. If triggered we'll try and limit our risk with a tight stop loss at $111.45, just under Friday's low.

- Suggested Positions -

Long the IWM @ $112.65

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

Long JAN $115 CALL (IWM160115C115) entry $1.18

12/15/15 triggered @ 112.65
Option Format: symbol-year-month-day-call-strike

Microsoft Inc. - MSFT - close: 55.35 change: +0.52

Stop Loss: 53.20
Target(s): To Be Determined
Current Gain/Loss: +2.2%
Entry on November 04 at $54.60
Listed on November 03, 2015
Time Frame: 6 to 8 weeks.
Average Daily Volume = 35.4 million
New Positions: see below

12/23/15: MSFT followed the market higher but shares failed to keep pace with the S&P 500's +1.2% gain. The stock is nearing prior resistance in the $56.00 area.

No new positions at this time.

Trade Description: November 3, 2015:
MSFT is more than just a software company. MSFT is in the technology sector. It is considered part of the business software industry. According to the company, "Microsoft is the leading platform and productivity company for the mobile-first, cloud-first world, and its mission is to empower every person and every organization on the planet to achieve more."

The company is run under three segments. They have their productivity and business processes segment. This includes commercial office software, personal office software, and more. One of their fastest growing segments is MSFT's Intelligent Cloud business, which includes their server software and enterprise services. Then they have their "More Personal Computing" segment. This includes their Windows operating software, MSN display advertising, Windows phones, smartphones, tablets, PC accessories, Internet search, and their Xbox platform.

The stock has been dead money for almost a year. MSFT peaked near round-number resistance at $50.00 back in November 2014. Shares channeled sideways between support at $40 and resistance at $50 for months. That changed last month.

MSFT reported its 2016 Q1 results on October 22nd. Analysts were expecting a profit of $0.59 a share on revenues of $21.04 billion. MSFT beat both estimates with a profit of $0.67 a share. Revenues came in at $21.66 billion. Their Intelligent Cloud segment saw sales rise +8% but it was actually +14% on a constant currency basis.

Shares of MSFT soared the next day with a surge to 15-year highs. The big rally is based on investors' belief that MSFT and its relatively new management is successfully transitioning away from declining PC sales and moving quickly towards the cloud (and mobile).

Normally I would hesitate to buy a stock like MSFT after a big gap higher. Too often stocks tend to fill the gap. However, shares of MSFT have been able to levitate sideways in the $52.50-54.50 zone as traders keep buying the dips. Odds are growing we could see MSFT rally toward its all-time highs near $60.00 a share from December 1999. The big gain in October produced a buy signal on the point & figure chart, which is now forecasting a long-term target of $82.00. Tonight we are suggesting a trigger to launch bullish positions at $54.60.

- Suggested Positions -

Long MSFT stock @ $54.60

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

Long 2016 JAN $55 CALL (MSFT160115C55) entry $1.54

12/01/15 new stop @ $53.20
11/04/15 triggered @ $54.60
Option Format: symbol-year-month-day-call-strike

SolarEdge Technologies - SEDG - close: 27.92 change: +0.24

Stop Loss: 24.95
Target(s): To Be Determined
Current Gain/Loss: +30.2%
Entry on December 15 at $21.45
Listed on December 14, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 790 thousand
New Positions: see below

12/23/15: SEDG erased yesterday's minor decline with a +0.8% bounce today. The action over the last three days looks like a bullish consolidation. Shares are coiling for a breakout past resistance in the $28.30 area.

Currently our stop is $24.95 but readers will want to seriously consider raising their stop loss at this time.

No new positions at this time.

Trade Description: December 14, 2015:
The world is changing. Over the weekend 195 countries signed a pledge to help cut greenhouse gas emissions and stall global warming. It doesn't matter if you're a climate change skeptic or a diehard supporter, governments are going to implement policies that change how we consume energy. It should be bullish for solar energy companies.

SEDG is in the technology sector. They're considered part of the semiconductor industry. According to the company, "SolarEdge provides an intelligent inverter solution that has changed the way power is harvested and managed in solar photovoltaic systems. The SolarEdge DC optimized inverter system maximizes power generation at the individual PV module-level while lowering the cost of energy produced by the solar PV system. The SolarEdge system consists of power optimizers, inverters and a cloud-based monitoring platform and addresses a broad range of solar market segments, from residential solar installations to commercial and small utility-scale solar installations."

The company is growing fast. Their Q2 results, announced on August 12th, beat estimates on both the top and bottom line. Revenues were up +120% from the prior year and management raised their Q3 guidance.

Q3 results were announced on November 4th. Analysts were expecting a profit of $0.29 a share on revenues of $110 million. SEDG beat both estimates. Earnings were $0.36 a share. Revenues were up +16.9% from the prior quarter and up +71.8% from a year ago to $115.1 million. Gross margins improved from 28.7% in Q2 to 29.1% in Q3.

Guy Sella, the founder, Chairman, and CEO of SolarEdge, commented on their quarter, "We are very satisfied with another strong quarter of record revenues and improved gross margins. In addition to our very positive financial results, this quarter we introduced our new HD Wave inverter topology, demonstrating our technological leadership in the market. We are confident that our global presence and expanded product offering position us well for continued growth." Management then raised their full-year 2015 revenue guidance.

The stock appears to have bottomed with the lows in the $15-16 area. The last few weeks have seen the trend reverse higher with a pattern of higher lows and higher highs. Shares recently broke through significant resistance at $20.00, at its 50-dma, and its trend line of lower highs. The point & figure chart is bullish and forecasting at $27.00 target.

The stock displayed relative strength today. We are suggesting a trigger to launch small bullish positions at $21.20. SEDG has been volatile in the past. I consider this a more aggressive, higher-risk trade.

- Suggested Positions -

Long SEDG stock @ $21.45

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

Long MAR $25 CALL (SEDG160318C25) entry $2.10

12/21/15 new stop @ 25.85
12/16/15 new stop @ 24.95
12/15/15 new stop @ 19.25
12/15/15 triggered on gap open at $21.45, trigger was $21.20
Option Format: symbol-year-month-day-call-strike

Strayer Education Inc. - STRA - close: 62.32 change: +0.93

Stop Loss: 57.45
Target(s): To Be Determined
Current Gain/Loss: +0.4%
Entry on December 23 at $62.05
Listed on December 21, 2015
Time Frame: Exit PRIOR to earnings in February
Average Daily Volume = 118 thousand
New Positions: see below

12/23/15: STRA managed to outperform the market's widespread rally today. Shares gained +1.5% and broke out to new multi-month highs. Shares hit our suggested entry point at $62.05.

Trade Description: December 21, 2015:
STRA has been outperforming the market since its bottomed in the low $40s in July this year. The stock is currently up about +45% from its 2015 lows.

STRA is in the services sector. According to the company, "Strayer Education, Inc. is an education services holding company that owns Strayer University. Strayer's mission is to make higher education achievable for working adults in today's economy. Strayer University is a proprietary institution of higher learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, health services administration, public administration, and criminal justice to working adult students. The University includes Strayer@Work, which serves corporate clients by delivering the next generation of performance improvement and workforce development. Strayer University also offers an executive MBA online and corporate training program through its Jack Welch Management Institute. The University is committed to providing an education that prepares working adult students for advancement in their careers and professional lives."

The for-profit education stocks have had a hard time in recent years. Accusations of predatory practices and misleading advertising has prompted tougher government oversight, new regulations, and fueled investor concerns (and lots of selling). Last year (July 2014) rival Corinthian Colleges unexpectedly shut their doors without warning and left students without a diploma and lots of student debt. Then several weeks ago, in early October, Apollo Education (APOL), the group that runs University of Phoenix, disclosed it was on probation with the Department of Defense and no longer allowed to recruit students on U.S. military installations. Shares of APOL plunged -10% on the headlines and it pressured the rest of the group lower.

STRA has managed to rally past these concerns, albeit after a very rough start to 2015. Looking at the last couple of years STRA soared in 2014 with a rally from the $33 area up to $80 by November 2014. That was the peak. STRA plunged from November 2014 until July 2015. Then suddenly shares reversed sharply higher following a better than expected earnings report.

It was July 29th when STRA announced their Q2 earnings results. Wall Street was expecting a profit of $0.99 a share on revenues of $108.1 million. STRA beat estimates with a profit of $1.11 a share. Revenues were down -2.6% but better than expected at $109.8 million. The company beat estimates again in October. STRA's Q3 results were $0.32 a share on revenues of $99.1 million, both above expectations.

The stock displayed relative strength last week. That relative strength continued today with a +2.8% gain and a breakout above round-number resistance at $60.00. If STRA can breakout past its recent intraday highs I wouldn't be surprised to see it rally toward $70. At the moment the point & figure chart is bearish but a rise above $62.00 will produce a new triple-top breakout buy signal.

Today's intraday high was $61.12. The November 30th intraday high was $61.62. Tonight we are suggesting a trigger to launch small positions at $62.05. We want to keep positions small to limit risk. STRA have proven over and over again that it can be a volatile stock. That's probably why the option spreads are so wide (and makes the options a little less appetizing).

A note on student debt - ballooning student debt has been a major financial concern for the U.S. over the last few years. Today student debt is about $1.2 trillion. That's more than auto loans or credit card debt and is only second to mortgage debt. Prognosticators have been warning about the bubble bursting in student debt for a while. It hasn't happened yet. I doubt it will happen in the next few weeks but investors should be aware that shares of STRA might be sensitive to any negative headlines regarding the subject.

*small positions to limit risk!* - Suggested Positions -

Long STRA stock @ $62.05

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

Long APR $65 CALL (STRA160415C65) entry $4.20

12/23/15 triggered @ $62.05
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

Eagle Materials Inc. - EXP - close: $61.13 change: +2.19

Stop Loss: 61.65
Target(s): To Be Determined
Current Gain/Loss: -4.2%
Entry on December 21 at $58.65
Listed on December 19, 2015
Time Frame: Exit PRIOR to earnings in February
Average Daily Volume = 800 thousand
New Positions: see below

12/23/15: The dash-for-trash tend was alive and well today. EXP surged +3.7% after tagging new multi-year lows yesterday. Our stop loss is at $61.65. Today's intraday high was $61.34. Any follow through higher tomorrow could stop us out.

No new positions.

Trade Description: December 19, 2015:
The outlook for homebuilders has soured and the XHB homebuilders ETF has sunk toward multi-month lows. Meanwhile the energy sector is getting crushed as crude oil falls to six-year lows. Together they make a tough environment for EXP who serves both homebuilders and the energy industry.

EXP is in the industrial goods sector. According to the company, "Eagle Materials Inc. manufactures and distributes Cement, Gypsum Wallboard, Recycled Paperboard, Concrete and Aggregates, and Oil and Gas Proppants from 40 facilities across the US. Eagle is headquartered in Dallas, Texas."

The company has struggled to meet Wall Street earnings estimates all year long. The last three quarters in a row have seen EXP miss both the earnings estimate and the revenue estimates. Their most recent report was October 26th. Analysts were looking for a profit of $1.18 per shares on revenues of $336.6 million. EXP only delivered $1.11 a share, which was a -40% drop from a year ago. Revenues were up +15.5% from a year ago to $329.0 million, below expectations.

Technically the stock is in a bear market. The market's bounce on Tuesday and Wednesday produced an oversold bounce in shares of EXP but this has failed with the market's reversal lower in the last two sessions. The point & figure chart is bearish and forecasting at $47.00 target. EXP has broken down below what should have been round-number support at $60.00. The next support level could be the $50.00 region. Tonight we are suggesting a trigger to launch bearish positions at $58.65.

- Suggested Positions -

Short EXP stock @ $58.65

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

Long FEB $55 PUT (EXP160219P55) entry $2.18

12/21/15 triggered @ $58.65
Option Format: symbol-year-month-day-call-strike

GameStop Corp. - GME - close: 28.75 change: +0.15

Stop Loss: 31.25
Target(s): To Be Determined
Current Gain/Loss: +4.9%
Entry on December 11 at $30.22
Listed on December 10, 2015
Time Frame: 6 to 8 weeks
Option traders exit prior to January expiration
Average Daily Volume = 2.1 million
New Positions: see below

12/23/15: It was another quiet session for GME. Shares managed to deliver a +0.5% gain. The $29.00 and $30.00 levels still look like overhead resistance.

No new positions at this time.

Trade Description: December 10, 2015:
The future of video game purchases is digital downloads. That is why shares of GME have struggled the last couple of years. Their retail business model is in serious jeopardy.

GME is in the services sector. According to the company, "GameStop Corp., a Fortune 500 and S&P 500 company headquartered in Grapevine, Texas, is a global, multichannel video game, consumer electronics and wireless services retailer. GameStop operates more than 6,800 stores across 14 countries. The company's consumer product network also includes www.gamestop.com; www.Kongregate.com, a leading browser-based game site; Game Informer® magazine, the world's leading print and digital video game publication and the recently acquired Geeknet, Inc., parent company of ThinkGeek, www.thinkgeek.com, the premier retailer for the global geek community featuring exclusive and unique video game and pop culture products. In addition, our Technology Brands segment includes Simply Mac and Spring Mobile stores. Simply Mac, www.simplymac.com, operates 72 stores, selling the full line of Apple products, including laptops, tablets, and smartphones and offering Apple certified warranty and repair services. Spring Mobile, http://springmobile.com, sells post-paid AT&T services and wireless products through its 590 AT&T branded stores and offers pre-paid wireless services, devices and related accessories through its 69 Cricket branded stores in select markets in the U.S."

The company's earnings results have been mixed. Their Q2 report, announced on August 27th, came in better than expected. GME beat analysts' estimates on both the top and bottom line. Management raised their 2016 guidance. Guess what? Traders sold the news anyway.

Fast-forward to November. The stock has already reversed under major resistance near $48 again. Shares plunge on November 13th following an analyst downgrade. Ten days later GME reports their Q3 earnings results. Their profit was $0.54 a share. Not only is that 5% decline from a year ago but it's five cents below estimates. Revenues were down -3.6% to $2.02 billion, another miss. Hardware sales plunged -20% in the third quarter. Software sales were down -9%. GME's comparable store sales fell -1.1%, which was below guidance. If that wasn't enough management lowered their Q4 guidance below Wall Street estimates. Following this Q3 report the stock garnered several analyst downgrades.

One of GME's biggest challenges is digital downloads where customers do not have to leave their home (or dorm room) to purchase new games. They can just purchase it online over the Internet and have it immediately downloaded and start gaming. Not only does this jeopardize GME's new game sales but it also hurts a major portion of their business, which is reselling used games. If fewer people are buying hard copy discs of their video games then that means fewer people selling their used games back to GME, which the company resells at a healthy margin.

The trend of digital downloads started years ago but they are growing in popularity. The bearish story on GME is not a secret. That's probably the biggest risk. There are already a lot of bears in the name. The most recent data listed short interest at 53% of the 103 million share float. That much short interest can make the stock volatile to any potentially positive headlines. I think the bears are right and GME is headed lower as their business continues to struggle.

Another risk is valuation. The stock has fallen -33% in the last few weeks. Most of the analyst action in GME has been bearish with several downgrades. The stock currently trades with a P/E around 8.6. Eventually some analyst firm might decide to upgrade it on a valuation basis and the stock could see a short-term rally on this sort of headline. Fortunately traders usually sell the rallies in GME.

Currently GME is flirting with a breakdown below major support in the $31.50-32.00 area. A breakdown here could see the current downtrend accelerate. The point & figure chart is bearish and forecasting at $19.00 target. Tonight we are suggesting a trigger to open bearish positions at $31.40. Please note that this is an aggressive, higher-risk trade. GME can be a volatile stock. I am removing our normal entry point disclaimer regarding gap downs. Due to potential volatility traders may want to use the options instead of trying to short the stock. I am listing the January puts. You might want to consider the April puts (next available month).

- Suggested Positions -

Short GME stock @ $30.22

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

Long JAN $30 PUT (GME160115P30) entry $2.44

12/17/15 new stop @ 31.25
12/11/15 triggered on gap down at $30.22, suggested entry was $31.40
Option Format: symbol-year-month-day-call-strike

Harley-Davidson, Inc. - HOG - close: 46.55 change: +1.07

Stop Loss: 47.35
Target(s): To Be Determined
Current Gain/Loss: -1.7%
Entry on December 11 at $45.75
Listed on December 09, 2015
Time Frame: Exit prior to earnings in January
Average Daily Volume = 3.15 million
New Positions: see below

12/23/15: HOG could be another dash-for-trash candidate. The stock shot higher at the open and tagged its 20-dma near $47.00 before paring its gains. HOG ended today with a +2.35% advance. The $47.00 level is short-term resistance. Our stop is at $47.35. No new positions at this time.

Trade Description: December 9, 2015:
HOG was a big winner during the market's rally off the 2009 bear-market low. Shares surged from about $8 in early 2009 to over $74.00 in 2014. Unfortunately that bullish momentum is long gone.

HOG is in the consumer goods sector. According to the company, "Harley-Davidson, Inc. is the parent company of Harley-Davidson Motor Company and Harley-Davidson Financial Services. Since 1903, Harley-Davidson Motor Company has fulfilled dreams of personal freedom with custom, cruiser and touring motorcycles, riding experiences and events and a complete line of Harley-Davidson motorcycle parts, accessories, general merchandise, riding gear and apparel. Harley-Davidson Financial Services provides wholesale and retail financing, insurance, extended service and other protection plans and credit card programs to Harley-Davidson dealers and riders in the U.S., Canada and other select international markets."

The company has seen sales slow down. Their most recent earnings report was October 20th. Q3 earnings growth was flat (+0%) from a year ago at $0.69 a share. That missed estimates by 8 cents. Revenues only rose +0.9% to $1.14 billion, which also missed estimates. The company said their dealer new motorcycle sales were down -1.4% worldwide from a year ago. Their U.S. sales fell -2.5%. Shipments came in below guidance.

Matt Levatich, President and Chief Executive Officer, said, "We expect a heightened competitive environment to continue for the foreseeable future." The company lowered their shipment guidance for 2015. They also lowered their margin guidance. The stock reacted with a big drop on the earnings miss and lowered guidance. Multiple analyst firms downgraded the stock in response to the news.

Technically HOG is in a bear market. Shares have a bearish trend of lower highs and lower lows. HOG spent most of November struggling with resistance at $50.00. The recent weakness has pushed shares to new two-year lows. The next drop could push HOG toward $40 or lower. Tonight we are suggesting a trigger to launch bearish positions at $45.75.

My biggest concern is some analyst deciding that HOG looks "cheap" on valuation. At this point HOG could be a value trap. Cheap stocks can always get cheaper.

- Suggested Positions -

Short HOG stock @ $45.75

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

Long FEB $45 PUT (HOG160219P45) entry $2.59

12/16/15 new stop @ 47.35
12/11/15 triggered @ $45.75
Option Format: symbol-year-month-day-call-strike

iPath S&P500 VIX Futures ETN - VXX - close: 19.27 change: -0.47

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: +11.7%
2nd position Gain/Loss: +33.6%
Entry on August 25 at $21.82
2nd position: September 2nd at $29.01
Listed on August 24, 2015
Time Frame: to be determined
Average Daily Volume = 50 million
New Positions: see below

12/23/15: The U.S. stock market delivered its third, widespread rally in a row. The VXX lost another -2.3%.

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

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

Short the VXX @ $29.01

11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
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


Ctrip.com International - CTRP - close: 49.14 change: +0.61

Stop Loss: 50.55
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 15, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.7 million
New Positions: see below

12/23/15: We are removing CTRP as a candidate. The stock has been bouncing along support at $48.00 for almost two weeks now. Shares added +1.25% today and closed above their 10-dma (short-term resistance). The $50.00 level is still overhead resistance but the lack of momentum lower is not a good signal for the bears.

Trade did not open.

12/23/15 removed from the newsletter, suggested entry was $47.65


Western Digital Corp. - WDC - close: 60.32 change: +0.63

Stop Loss: 60.45
Target(s): To Be Determined
Current Gain/Loss: -2.7%
Entry on December 18 at $58.85
Listed on December 17, 2015
Time Frame: Exit PRIOR to earnings in late January
Average Daily Volume = 3.5 million
New Positions: see below

12/23/15: WDC delivered a bumpy ride this morning but it did break back above the $60.00 level. The stock quickly hit our new stop loss at $60.45.

The long-term trend for WDC is bearish. Shares may have benefited from the dash-for-trash concept today.

- Suggested Positions -

Short WDC stock @ $58.85 exit $60.45 (-2.7%)

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

FEB $55 PUT (WDC160219P55) entry $2.62 exit $1.79 (-31.7%)

12/23/15 stopped out
12/22/15 new stop @ 60.45
12/18/15 triggered @ $58.85
Option Format: symbol-year-month-day-call-strike