Option Investor

Daily Newsletter, Tuesday, 1/5/2016

Table of Contents

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

Market Wrap

Volatility Over?

by Jim Brown

Click here to email Jim Brown

After a -460 point drop intraday on Monday and -110 intraday decline today the Dow actually finished slightly positive. Does this mean the January volatility is over?

Market Statistics

After the worst opening drop in January since 1932, the markets traded sideways for most of Tuesday. However, sharp declines in some big cap tech stocks kept the Nasdaq under pressure to close with an 11 point loss. Biotechs gapped open to provide an opening bounce for the Nasdaq but the sector rolled over to a loss late in the day and barely recovered to close with a 0.7 point gain.

Apple (AAPL) was a big drag on the Nasdaq and the Dow after a Japanese news outlet said Apple would slash production of the iPhone by 30% between January and March. The report said iPhone inventories have risen sharply in Asia, Europe and the U.S. because of lack of demand. Apple shares fell -$3 to $102.71. That short I recommended last Tuesday at $108.75 is looking pretty good today.

Apple suppliers Avago Technologies (AVGO), Skyworks Solutions (SWKS) and NXP Semiconductor (NXPI) crashed along with Apple on worries of slowing demand. AVGO fell -3.4%, NXPI -2.4% and Skyworks -6%.

The Asian markets all finished lower but well off their lows. The Shanghai Composite traded down -3% intraday. Had the Shanghai finished at the -3% level I am sure our markets would have also been negative.

The worry in China is that the six-month ban on insider selling expires on Friday and will allow pent up selling by those insiders. That worry added to the slowing economy is weighing on their markets.

In the U.S., the economic reports were not as bad as in recent days. The vehicle sales for December came in at a pace of 17.3 million, which was well below the November pace of 18.2 million and the forecast for 18.2 million. However, the total sales for the year reached 17.47 million and a record high. This was about 700,000 over the level seen in 2014.

Annual Sales

2011 12.7 M
2012 14.4 M
2013 15.5 M
2014 16.5 M
2015 17.3 M

Despite the record numbers for the year, vehicle sales are slowing. Light truck sales fell for the second time in three months while auto sales fell for the second consecutive month. Auto sales fell from 7.8 million to 7.4 million while light truck sales declined from 10.4 million to 9.9 million.

Foreign manufacturers did the best. Nissan saw sales increase 18.6%, Toyota 10.8% and Chrysler Fiat +12.6%. Ford sales rose +8.4% and GM +5.7%.

Semiconductor stocks were down after the semiconductor billings for November declined -0.3% from the +1.9% rise in October. This was the first monthly decline since July. Global billings were $28.9 billion in November and that is -3.0% below year ago levels. That is the biggest YoY drop since mid-2012. North American sales are now -7.1% below year ago levels.

Relatively speaking today's reports, although negative were the best in several days. On Monday, the ISM Manufacturing Index for December fell further into contraction to 48.2, down from 48.6 in November. December was the lowest level since the recession. All the major components were also in contraction.

The weak ISM followed the Chicago PMI last week that fell from 48.7 to 42.7 and the lowest reading since 2009. The estimate was for a rise to 50.1. Order backlogs fell -17.2 points to 29.4 and the 11th month in contraction. New orders fell from 44.1 to 38.8 with employment dropping from 51.6 to 46.8.

This followed the Philly Fed Manufacturing Survey that declined from +1.9 to -5.9 and the third month of the last four in contraction. New orders declined from -3.7 to -9.5 and back orders fell from +2.4 to -17.7.

Construction spending declined -0.4% and the weakest since November 2014.

Moody's Chart

The Atlanta Fed real time GDPNow forecast is now predicting only 0.7% growth in Q4 and dropping fast.

The U.S. economy is sinking fast and that is another reason our markets are weak. China's economy has now contracted for ten consecutive months with the December PMI numbers at 48.2 and the lowest since the recession.

Investors are worried the Fed is pressing its rate hike cycle because they want to get a few hikes completed before the U.S. falls back into recession. However, energy, commodities and manufacturing are already in a recession. Consumer spending is the only thing keeping economic our head above water.

Tomorrow is the first look at the December employment picture. Jobs are expected to decline but not materially. The ADP report is expected to drop from 217,000 in November to 190,000 in December. Typically, some employers reduce the workforce ahead of year-end in order to start the new year fresh. The Nonfarm Payrolls on Friday are expected to decline from 211,000 to 200,000. However, these forecasts are rarely accurate. If jobs suddenly tumbled more than expected after last week's bearish economic reports, it could impart some additional bearish sentiment to the market.

This is one set of reports where I would like to see some blowout gains that would support the Fed's stated outlook for an improving economy. Otherwise, the bears could gain a tighter grip on the market.

There were several ratings changes on stocks today. Analysts are sharpening their pencils and recalculating targets for 2016. First Solar (FSLR) rallied sharply on an upgrade from Goldman Sachs to buy, saying shares could rise 50% in 2016. They raised the price target from $61 to $100 and shares spiked +5 to $72. Goldman said FSLR was the underappreciated bellwether in the sector. However, Goldman cast some shade on the rest of the sector with a downgrade to neutral.

Fitbit (FIT) was crushed for an 18% loss after they announced a new watch at the opening day of CES in Las Vegas. Fitbit announced the Blaze smartwatch with features similar to Apple's Watch. The Blaze has a five-day battery life compared to Apple's 12-18 hours. The watch sells for $199.95.

However, UnderArmour (UA) also showcased a connected fitness system that included more functions than the Blaze. The UA system can connect to sensors in your shoe and has wireless headphones. Fossil said it will introduce more than 100 wearable products in 2016.

Competition in the wearable market is heating up fast and that means Apple needs to stretch out that battery life quick or be left behind in the smartwatch space. The competitor announcements crushed Fitbit shares today and it is only going to get worse.

President Obama proved he was the best gun salesman on earth again today as he announced more plans for gun control. Rather than wait for congressional action that may never come he is using executive action to restrict gun sales.

Smith & Wesson (SWHC) shares rallied +11% to a new high. Their shares are now up more than 1000% since president Obama took office. Sturm Ruger (RGR) shares spiked 7% on the news.

Louis Navellier, chairman of Navellier Associates, said "Mr. Obama is the best gun salesman on the planet." When asked if his firm was getting any kickback from investors for their holdings in the gun companies and he said no, "they just want us to make money."

The FBI said they processed more background checks on Black Friday, 185,345, than any day on record. The previous high was 177,170 on 12/21/2012. The FBI said for all of 2015 they processed a record 23,141,970 background checks. The prior record was 21,093,273 in 2013. Since 1998, the FBI has processed more than 220 million background checks for gun purchases.

Eli Lilly (LLY) warned that earnings and revenue for 2016 would be below analyst expectations. The company expects revenue of $20.3-$20.7 billion and below consensus for $21.36 billion. Lilly guided for earnings in the range of $3.45-$3.55 and also below consensus for $3.65. Bernstein said the guidance was very conservative and took into account the $675 million to $1.0 billion in currency translation issues due to the strong dollar. Lilly shares rallied +$1.24 on the lowered guidance. They got a pass because of the strong dollar impact.

Amazon (AMZN) reported third party merchants selling on Amazon sold a record 23 million items on Cyber Monday. That was a +40% increase from the prior year. That is not total Amazon sales, just the third party sellers on Amazon. The company releases details in such a way it makes it hard to compare with prior years. For instance, the company also said sellers that used the "Fulfillment by Amazon" service or FBA, sold more than 1 billion items in 2015. Those are sellers that let Amazon warehouse and ship their products so that Amazon can guarantee the two-day delivery. Those active sellers using the FBA service grew by more than 50% and are now active in 100 countries with sales to 185 countries. Worldwide FBA sellers located in another country grew by more than 100%. The FBA service now delivers qualifying orders the same day to customers in more than 750 U.S. cities.

Shares declined $3 on Monday after Monness Crespi Hardt cut them from buy to neutral saying gross margins were getting squeezed and there was increasing competition to Amazon Web Services. They may have to eat that downgrade when Amazon reports earnings on Feb 4th.

Nordstrom (JWN) was cut by Citigroup from buy to neutral. The bank said the investment cycle for Nordstrom was peaking and the return on capital would begin to shrink. They repeated the fact that sales slowed in Q3 and probably were lackluster in Q4.

Citi upgraded JC Penny (JCP) from sell to neutral based on valuation. The stock declined -30% over the last two months to hit their target price. While they believe JCP will still have an uphill battle they said the risk/reward no longer favors the downside.

Crude Oil declined to $35.97 at the close and well off Monday's high at $38.39 despite the ongoing conflict in the Middle East. Saudi Arabia and Iran are fighting a new war of words and Saudi cut off diplomatic relations with Iran. Bahrain, Sudan, the UAE followed and Kuwait recalled its ambassador to Iran. Saudi is already fighting a proxy war against Iran in Yemen and Syria. A Middle East diplomat said the confrontation was a level 5 on a scale of 1-10 with 10 being a shooting war.

Crude prices initially spiked on the news of the escalating war of words but then declined on the outlook for even more supply. I know that seems counter intuitive but they believe Saudi Arabia, Kuwait and others will simply pump even more oil to punish Iran with lower prices. The low prices are causing serious harm to Iran's economy. Saudi Arabia went so far as to lower prices to Iran's customers in Europe in an effort to take away the buyers for Iran's oil. Iran currently produces about 2.5 million barrels per day and has said they will increase that by one million by July once sanctions are released. Saudi Arabia is producing about 10.5 mbpd and has the capacity to pump as much as 12.5 mbpd according to the Saudi oil minister.

The price war may just be getting started according to one analyst today. He said with Saudi cutting prices to Iran's customers in Europe that will likely begin an entirely new series of price cuts by both countries.


In one of the other newsletters last week, I said, "There is a seasonal bout of volatility in the first week of January. We either shoot up big or fall off a cliff. It is a coin flip for direction." We lost the coin toss and the winners elected to press their advantage.

Obviously, we could not have predicted the dramatic reaction to China's economic numbers and the worries over the expiring trading ban. We also did not expect the U.S. economics to be so negative. Add those factors to the normal January tax selling and it has been an ugly week and it is just Tuesday. The S&P futures are down -25 as I type this so tomorrow is not looking to exciting either.

At this point, we simply need to stand aside and let the market do its thing. Eventually the market forces will equalize and the market will become buyable again. We needed a decent dip to finally remove the sellers that had been weighing down the market since early November. We saw that big rebound from the September lows and once it began to weaken we had significant volatility over the last two months as sellers continued to jump on every 2-3 day rally. I would like them to get it out of their system and let the markets retest the August lows. Once we have a decent retest maybe we can begin a bullish rally that lasts until summer.

Many analysts believe the market will be the strongest in the first six months of the year. I would love to be able to buy a retest and ride those positions up for that expected rally.

The S&P declined on Monday to 1,989 and exactly to the 50% retracement point from the August lows. If that 1,989 level breaks I think we will get our retest of the lows. Some technicians are looking for 1,969 as a pause point but I think sentiment has been damaged and a break below 1,989 is the trigger for a larger decline. The Monday low was another lower low and until that cycle is broken, we should continue to expect lower highs and lows. Note the MACD and RSI are both negative.

The Dow actually made a decent recovery from the -110 intraday drop. Goldman, Apple and Disney were the biggest losers but the winners were pretty broad based. We are still seeing a dash for trash with the most beaten up stocks from 2015 finding the most buyers in 2016.

The Dow also made a lower low with the -43 point intraday dip under 17,000 on Monday. The 17,000 level is now our line in the sand and the Dow futures are down -160 and trading at 16,927 as I type this. If we close under 17,000 we are in deep trouble and we could retest 16,000.

With earnings coming up in two weeks there could be some anticipation to lift stocks but with earnings for the quarter expected to decline -4% and companies warning every day we could see the reverse effect.

The Nasdaq closed right on the threshold of the abyss. Support at 4888-4900 has been broken both days but the close at 4,891 is still clinging by its fingernails. If that support fails we are probably going to retest the 4,600 level or even 4,500. Nasdaq futures are down -53.

The big cap techs are sinking fast and the biotechs were not adding support on Tuesday. If Apple continues to decline and take AVGO and SWKS with it the Nasdaq will suffer from a sentiment perspective.

The Russell 2000 imploded on Monday and managed only a 1.8-point rally today. The index tested support at 1100-1102 on both days. A further decline would target 1,082 and that would be a -16.5% decline from the highs. Small caps are normally favored in early January and that is not happening. This is negative for market sentiment and we can see that impacting all the indexes. Russell futures are down -10.

The Dow transports closed near a two-year low on Monday and barely recovered positive territory on Tuesday thanks to rate increases by three major airlines. The weak economics are going to be a continued drag on the transport sector and the overall market.

The Chinese economics, Saudi/Iran conflict and weak U.S. economics triggered a rapid dose of window undressing and tax selling. Anyone thinking about holding their yearend window dressing purchases for a few more days in hopes of a bounce from end of year retirement contributions into mutual funds, changed their mind in a heartbeat before the open on Monday.

Those not so quick on the trigger on Monday were probably hoping for a rebound today so they could reduce their losses. That did not happen and now we are looking at a significantly negative open on Wednesday if the futures do not improve.

I would continue to stand aside and wait for the market to settle. I ended my commentary over the weekend with the quote from Mark Yusko at Morgan Creek Capital Mgmt. "Trying to catch falling knives always results in lost fingers. Better to let the knife hit the floor, bounce around a little and when it stops moving go pick it up." We need to let the knives bounce around this week and look for a better opportunity in the days to follow.



Don't trade alone in 2016 the 2015 End-of-Year Annual Subscription Sale is Expiring!  You’ll save $1,147 when you renew now.

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see for at least a year! There isn’t a minute to spare. 
Order now.

Renew for as little as $495,
ONLY $1.35 per day

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Plays

Pricing Pressures Push Shares Lower

by James Brown

Click here to email James Brown


CF Industries - CF - close: 39.23 change: -1.27

Stop Loss: 42.05
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 05, 2016
Time Frame: Exit PRIOR to earnings in mid February
Average Daily Volume = 2.7 million
New Positions: Yes, see below

Company Description

Trade Description:
CF underperformed the broader market and its sector in 2015. The S&P 500 lost -0.7% for the year while the IYM basic materials ETF lost -14.4%. Shares of CF returned a -25% loss last year. Momentum remains to the downside.

According to the company, "CF Industries Holdings, Inc., headquartered in Deerfield, Illinois, through its subsidiaries is a global leader in the manufacturing and distribution of nitrogen products, serving both agricultural and industrial customers. CF Industries operates world-class nitrogen manufacturing complexes in Canada, the United Kingdom and the United States, and distributes plant nutrients through a system of terminals, warehouses, and associated transportation equipment located primarily in the Midwestern United States. The company also owns a 50 percent interest in an ammonia facility in The Republic of Trinidad and Tobago."

It is important to note that CF is currently in the process of merging with OCI. Here's a brief description, "OCI N.V. is a global producer and distributor of natural gas-based fertilizers and industrial chemicals based in the Netherlands. The company produces nitrogen fertilizers, methanol and other natural gas based products, serving agricultural and industrial customers from the Americas to Asia. The company ranks among the world's largest nitrogen fertilizer producers, and can produce more than 8.4 million metric tons of nitrogen fertilizers and industrial chemicals at production facilities in the Netherlands, the United States, Egypt and Algeria."

Once the merger is completed they plan to move the new company's headquarters to the Netherlands to reduce their tax burden. Last year some U.S. government officials voiced their displeasure at these tax-inversion mergers to avoid paying U.S. taxes. There is a chance (albeit a small one) that the U.S. tries to stop this merger before it's completed.

Meanwhile the company continues to struggle with weak prices for nitrogen fertilizer. Looking at CF's last four quarterly earnings reports they have missed Wall Street's earnings estimates three of the last four quarters (and two quarters in a row). Revenues were down -8.3%, -15.8%, -10.9%, and -0.7% in the most recently reported quarter.

CF faces tough competition from fertilizer producers in China and in Russia and the Ukraine. It is worth noting that Bank of America just recently came out with a bullish call on CF. The BoA analyst suggested that fertilizer prices are too low and will bounce and CF's stock price should bounce with it. CF claims demand remains strong but that doesn't help if prices keep falling (obviously demand isn't strong enough or prices would rise).

Technically the path of least resistance is down and CF just broke support near $40.00. These are new two-year lows. Tonight we are suggesting a trigger to launch bearish positions at $38.85. Plan on exiting prior to CF's earnings report in mid February.

Trigger @ $38.85

- Suggested Positions -

Short CF stock @ $38.85

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

Buy the FEB $35 PUT (CF160219P35) current ask $1.02
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:

Long-term Chart:

In Play Updates and Reviews

Stocks Fail To Fall (much lower)

by James Brown

Click here to email James Brown

Editor's Note:
Yesterday the U.S. market started 2016 on a sour note. Fortunately there was no follow through lower. Most of the market managed a bounce although the major indices were mixed on the session and the bounce we did see was rather anemic.

Solar energy names seemed to be an exception. Yesterday they showed relative strength. Today most of them were showing relative weakness.

Current Portfolio:

BULLISH Play Updates

Canadian Solar Inc. - CSIQ - close: 27.50 change: -0.48

Stop Loss: 26.95
Target(s): To Be Determined
Current Gain/Loss: -3.4%
Entry on January 05 at $28.46
Listed on January 02, 2016
Time Frame: 6 to 8 weeks
Option traders: exit PRIOR to February expiration
Average Daily Volume = 2.2 million
New Positions: see below

01/05/16: Shares of First Solar (FSLR) were given a huge upgrade this morning by Goldman Sachs who raised their price target on FSLR to $100. FSLR closed yesterday at $66.72. This headline fueled widespread gains for a lot of solar-energy stocks. Most of them gapped higher at the open. CSIQ gapped higher at $28.46. That immediately triggered our play since last night we adjusted our entry point down to $28.25. Unfortunately FSLR was one of the fuel solar stocks to maintain its gains today. CSIQ saw its rally reverse and shares closed down -1.7%.

Our trade was opened this morning but I am not suggesting new positions at this time. If this weakness continues we could see CSIQ hit our stop at $26.95 tomorrow.

Trade Description: January 2nd, 2016:
Solar stocks are back in vogue thanks to some major policies changes in the U.S. and the rest of the world. A couple of weeks ago 195 countries agreed to reduce greenhouse gas emissions when they signed the Cop21 agreement in Paris, France. A recent report by analysts at MIT suggested that the Cop21 deal could see solar energy demand triple in the next 15 years.

CSIQ is in the technology sector. They are considered part of the specialty semiconductor industry. According to the company, "Founded in 2001 in Canada, Canadian Solar is one of the world's largest and foremost solar power companies. As a leading manufacturer of solar photovoltaic modules and a provider of solar energy solutions, Canadian Solar has a geographically diversified pipeline of utility-scale power projects. In the past 14 years, Canadian Solar has successfully deployed over 12 GW of premium quality modules in over 70 countries around the world. Furthermore, Canadian Solar is one of the most bankable companies in the solar industry, having been publically listed on NASDAQ since 2006."

In addition to the Cop21 deal in Paris there was also significant news out of Washington in December. Both Congress and the Senate passed a budget deal that included a five-year extension for the solar tax credits. This really ignited the rally in solar stocks.

Fast forward to last week and Bloomberg reports that China is poised to boost their solar energy. Here's an excerpt from the Bloomberg article, "China, the world's biggest clean energy investor, plans to increase wind and solar power capacity by more than 21 percent next year as it works to reduce greenhouse gas emissions by cutting its reliance on coal. The nation is targeting at least 20 gigawatts of new wind power installations and 15 gigawatts of additional photovoltaic capacity next year, the National Energy Administration said in a statement on Tuesday."

It would appear that the major solar energy companies should have at tailwind for their business as they head into 2016. CSIQ, with its widespread international business, should do well. The stock has developed a bullish trend of higher lows. The last few weeks have seen CSIQ break through multiple layers of resistance. The point & figure chart is bullish and forecasting at $40 target.

The last three days have seen traders buying the dips at CSIQ's rising 10-dma. Shares displayed relative strength on Thursday with a +1.1% gain. Tonight we are suggesting a trigger to launch bullish positions at $29.25 with a relatively tight stop loss at $27.85. More conservative investors may want to wait for CSIQ to close above potential round-number resistance at $30.00 as an alternative entry point instead.

- Suggested Positions -

Long CSIQ stock @ $28.46

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

Long FEB $30 CALL (CSIQ160219C30) entry $1.60

01/05/16 triggered on gap open at $28.46, entry trigger was $28.25
01/04/16 adjust entry strategy - move the entry trigger lower from $29.25 down to $28.25 and adjust the stop loss down to $26.95
Option Format: symbol-year-month-day-call-strike

The Kroger Co. - KR - close: 42.09 change: +0.93

Stop Loss: 40.45
Target(s): To Be Determined
Current Gain/Loss: -1.5%
Entry on December 30 at $42.75
Listed on December 26, 2015
Time Frame: Exit PRIOR to earnings in early March
Average Daily Volume = 726 thousand
New Positions: see below

01/05/16: It was encouraging to see traders buying the dip in KR today. The stock surged at the open and broke through short-term resistance near $42.00 near the closing bell. Shares outperformed the broader market with a +2.25% gain on Tuesday. The stock looks poised to challenge its recent highs near $42.65 soon.

Trade Description: December 26, 2015:
If you're looking for a company with consistent growth then look no further. KR appears to be the king of same-store sales and recently announced 48 quarters of consecutive same-store sales growth.

KR is in the services sector. According to the company, "Kroger, one of the world's largest retailers, employs nearly 400,000 associates who serve customers in 2,626 supermarkets and multi-department stores in 34 states and the District of Columbia under two dozen local banner names including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry's, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smith's. The company also operates 780 convenience stores, 327 fine jewelry stores, 1,342 supermarket fuel centers and 37 food processing plants in the U.S."

A few months ago BusinessInsider ran an interesting article on KR that suggested the grocery chain is shaping up to be growing competition for the fast-food industry. A recent poll showed that 1 out of 4 consumers would choose Kroger instead of McDonald's to grab a quick bite to eat. KR has become more attractive because they have been expanding their prepared-food selection.

Another interesting tidbit came from CNBC Mad Money's Jim Cramer who said KR has twice the growth of rival Whole Foods Market (WFM). KR's most recent quarterly results showed same-store sales growth of +5.4%, which easily outpaces its rivals.

Speaking of Whole Foods, KR is quickly catching up. WFM built its brand on organic and natural foods, which also happen to have better margins than traditional grocery items. Rivals took notice and KR jumped into organics with both feet. According to JPMorgan, KR is on track to surpass WFM as the biggest seller of organic foods within the next two years. (FYI: Costco actually sells more organic food than anyone else in the U.S. but they are not a traditional grocery story).

Looking at the company's results they continue to beat estimates. KR announced their fiscal 2015 Q1 results on June 18th with earnings of $1.25 per share. That beat estimates of $1.22. Revenues were $33.05 billion, which actually missed estimates. The stock rallied anyway. KR management reaffirmed their fiscal year 2016 earnings forecast for $3.80-3.90 per share (essentially +10% growth).

Their 2015 Q2 results were announced on Sept. 11th. Earnings were $0.44 a share, beating estimates by five cents. Revenues were relatively flat at $25.44 billion. Same-store sales were up +5.3%. Management raised their full-year same-store sales guidance from +3.5%-4.5% to 4.0-5.0%

Q3 earnings came out on December 3rd. Earnings of $0.43 a share beat expectations by four cents. Revenues were still relatively flat at $25.07 billion (from a year ago). Same-store sales were up +5.4%. Management then raised their fiscal 2016 earnings guidance above Wall Street estimates. The stock soared on this report and bullish outlook.

Traders have been reluctant to let go of KR's stock. When the market dipped sharply a couple of weeks ago investors jumped in to buy the dip. Now KR has rebounded back toward its all-time highs. The point & figure chart is very bullish with a long-term target of $62.00. Thursday's intraday high was $42.67. Tonight we are suggesting a trigger to launch bullish positions at $42.75.

- Suggested Positions -

Long KR stock @ $42.75

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

Long APR $45 CALL (KR160415C45) entry $1.15

12/30/15 triggered @ $42.75
Option Format: symbol-year-month-day-call-strike

SolarCity Corp. - SCTY - close: 50.44 change: -2.35

Stop Loss: 47.95
Target(s): To Be Determined
Current Gain/Loss: -5.9%
Entry on January 05 at $53.61
Listed on January 04, 2016
Time Frame: Exit PRIOR to earnings (late January or early February)
Average Daily Volume = 3.8 million
New Positions: see below

01/05/16: SCTY is another solar-energy stock that gapped higher this morning. Our suggested entry point was $53.15. Our trade opened this morning at $53.61. Sadly that proved to be the high of the day. Traders sold the rally and SCTY ended Tuesday's session with a -4.4% drop (a -5.9% decline from its morning high).

Our trade was opened this morning but I am not suggesting new positions at this time. The recent lows near $48.40 should be support. However, I am optimistic that SCTY will find support at its 200-dma (near $49.15) or even bounce from current levels near $50.00. Yet I am not optimistic enough to buy SCTY near its lows for the session.

No new positions tonight. Let's see how SCTY performs tomorrow.

Trade Description: January 4, 2016:
We recently traded SCTY and caught a good chunk of its December rally. It looks like the stock is poised for round two and about to sprint higher again. Here is an updated play description:

December 2015 saw major headlines with 195 countries signing the Cop21 agreement at a U.N. climate change conference in Paris. Their pledge to fight global warming and cut greenhouse gas emissions could mean major developments for the solar-energy industry.

SCTY is in the technology sector. Officially it's part of the semiconductor industry. They bill themselves as "America's #1 full-service solar provider." According to the company, "SolarCity® provides clean energy. The company has disrupted the century-old energy industry by providing renewable electricity directly to homeowners, businesses and government organizations for less than they spend on utility bills. SolarCity gives customers control of their energy costs to protect them from rising rates. The company makes solar energy easy by taking care of everything from design and permitting to monitoring and maintenance. SolarCity currently serves 19 states."

The earnings picture is improving. Their most recent earnings report was October 29th. SCTY reported their Q3 results. Wall Street was expecting a loss of ($1.94) a share on revenues of $111.4 million. SCTY blew away the EPS estimate with a loss of just ($0.20) a share. Revenues were up +95% to $113.85 million.

The company provided bullish guidance. They see Q4 installations up +58-69% over a year ago. They introduced 2016 guidance of +40% growth for full-year installations. They have also driven their cost per watt to a new low of $2.84. The company is focused on reducing overall costs even more.

If the Cop21 agreement wasn't enough there was also big news out of Washington in December. Both Congress and the Senate agreed to a budget deal that included a five-year extension on solar-energy tax credits. This is a BIG deal for the industry and really fueled the rally behind solar stocks.

After a rally from $25 to almost $59 in just a few weeks SCTY finally encountered some profit taking in the last half of December. You'll notice that shares founds support near $48.35, just below its simple 200-dma. Now after basing there for a couple of days the stock displayed relative strength with a big bounce today (+3.4%).

SCTY still has a lot of short interest and further gains could fuel another short-covering rally. I want to remind investors that SCTY is a volatile stock and we should consider this a higher-risk, more aggressive trade. We will try and limit risk with a stop loss at $47.95. Tonight we are listing a trigger to open small bullish positions at $53.15.

NOTE: This could be a short-term play. Normally we like to exit prior to a company's earnings announcement. There is no set date yet but SCTY will likely report earnings in very late January to mid February. We will update our time frame once the company announces its earnings date.

- Suggested Positions -

Long SCTY stock @ $53.61

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

Long FEB $55 CALL (SCTY160219C55) entry $3.85

01/05/16 triggered on gap open at $53.61, suggested entry was $53.15
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

GameStop Corp. - GME - close: 28.77 change: +0.46

Stop Loss: 29.35
Target(s): To Be Determined
Current Gain/Loss: +4.8%
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

01/05/16: I am still urging caution on our GME trade. Shares outperformed the market today with a +1.6% gain. The rally did fail at resistance near $29.00 but GME did manage to close above short-term resistance at its 10-dma.

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

01/04/16 Caution - GME sank to new lows and reversed higher.
12/30/15 new stop @ 29.35
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: 45.29 change: -0.23

Stop Loss: 47.35
Target(s): To Be Determined
Current Gain/Loss: +1.0%
Entry on December 11 at $45.75
Listed on December 09, 2015
Time Frame: Exit prior to earnings in late January
Average Daily Volume = 3.15 million
New Positions: see below

01/05/16: HOG shares saw some volatility this morning. The stock opened higher and rallied past short-term resistance in the $46.00-46.20 zone and its 20-dma. Fortunately the rally failed relatively fast. HOG ended the session with a -0.5% decline.

More conservative investors may want to move their stop closer to today's high (maybe right above $46.40).

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: 20.67 change: -0.67

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: + 5.3%
2nd position Gain/Loss: +28.7%
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

01/05/16: When there was not any serious follow through on yesterday's market decline the volatility indices retreated. The VIX fell -6.5% and the VXX lost -3.1%.

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