Option Investor

Daily Newsletter, Wednesday, 1/27/2016

Table of Contents

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

Market Wrap

Disappointment Follows the FOMC Announcement

by Keene Little

Click here to email Keene Little
The market got hit this morning following yesterday's after-hours earnings report from AAPL but then recovered nicely. Just as it was about to stand up, the market got hit again by the FOMC announcement, which kept rates the same but left the market with a mixed message.

Today's Market Stats

The market tried gallantly to rally today after an initial down opening following the disappointing reaction to AAPL's earning's last night. It actually rallied strongly (about 30 points for SPX) into a midday high but then slowly pulled back into this afternoon's FOMC announcement. Following the usual cha-cha-cha after the announcement the market then sold off sharply. The net result is a sideways market following last Friday's high and a lack of direction at the moment.

Part of the market's concern is whether or not our economy is heading into a recession (it's been my contention that we're already in one but it won't be recognized by economists until we get another quarter or two of data). The stock market typically tops out about six months before it's announced we're officially in a recession so perhaps that will mean we'll see an announcement this summer. But our stock market has been so disconnected from reality and pumped up on extra liquidity from the Fed that the normal economic metrics have had little to do with stock performance.

I also hear many say we won't be in a recession as long as the yield curve has not inverted and they base their decision to stay long the market based on that. But I don't think it's hard to agree on the fact that yields have been grossly distorted by the Fed and that makes this argument more difficult. The bottom line is that there are many arguments about whether or not the economy is weak enough, and getting weaker, that we should be concerned about the end of the bull market. I think January's decline has answered that question for us (actually August did but many believe it was just another flash-crash correction in the ongoing bull market).

Adding to the difficulties in figuring out the economic data is that it's been voodoo economic numbers from organizations that have a desire to "massage" the data. Jim has been regularly posting the chart of GDP growth expectations from the Atlanta branch of the Federal Reserve. It's at least a lot more accurate (not as optimistic as the Fed always is) but it too has been ratcheted down repeatedly over the past year. It's currently showing an expected Q4 growth of just +0.7% but that's still using the government's massaged economic data. At the beginning of the quarter we were told to expect +2.7% growth. Oops. And it's that oops that's causing some concerns by investors. Smart money has been exiting this market stealthily for a while.

The January ISM (Institute of Supply Management) report was the sixth consecutive month of decline for the manufacturing index and the past two months have been below 50 (contraction territory). The response by many has been "so what, the services component is still strong." I think that's turning a blind eye to the problem of a slowing economy that can be tracked by many other measures, such as transportation. Every measure of transportation, whether by truck, rail or ship, is in a strong decline.

As much as the Fed has been trying to fight deflation, they're losing the battle. The PPI (Producer Price Index) has been declining since last summer. The Empire State Manufacturing index, an important gauge for the country, dropped significantly into negative territory. And yet the Fed's economic models told it the economy was strong enough to warrant a rate increase in December. I think history will say the Fed caused the next market crash but in fact it had already started. But I don't mind them getting the blame since they've completely screwed up in so many ways. Maybe it will help to get them abolished before the bear market is dead.

The Fed relies heavily on employment data, one of Janet Yellen's favorite measures of economic strength. The building could be burning down but she sees firemen at work and feels safe. The problem with the employment numbers is that it's only a surface number. Beneath the surface you can see so many problems such as the kinds of jobs (low paying, part time, one person holding two or three of those part time jobs, etc.). A big problem with using employment data is that it's a significant lagging indicator and often peaks the same time as the stock market in front of a recession. The real numbers, such as business sales down -4%, CapEx orders down -6% year-over-year, trading goods volume down -7% y-o-y, exports down -12%...you get the picture and it's not a pretty one.

So with all that, how does the Fed see things? If you read the minutes you'll see they believe the labor market continues to improve even as economic growth slowed. They changed the language of how household spending and business fixed investments are doing, saying spending is increasing at "moderate rates", which is a change from "solid rates." They did acknowledge there's a global drag on the U.S. economy and that they're not as confident that inflation will climb (they're worried about "disinflation). They kept the language that they expect inflation to rise to 2% over the medium term (not defined) as the "transitory effects" of the decline in energy prices dissipate and the labor market strengthens. They dropped the sentence that said they saw an improvement in the labor market and that they're confident that inflation will rise. Their concerns resulted in a decision to pause rate hikes while they remain "data dependent." I continue to believe the Fed will lower again (heading for negative rates, like Europe) before they raise rates further.

The market apparently did not like the fact that the Fed hasn't turned more overtly accommodative, even though their statement says they remain accommodative. The other concern is the Fed's recognition, in their language changes, that the economy is not doing as well as they thought in December. Well, I at least have to credit them for noticing the obvious.

Interestingly, this afternoon's strong selloff, which might not be quite done, could be setting us up for another rally to give us a larger bounce pattern off last Wednesday's low. But once this bounce off last Wednesday's low has completed, which it might have already done, we should see the market continue lower.

I'll start off with the INDU's charts tonight and the chart below is a weekly line chart, which shows the important weekly closing prices. I've drawn an up-channel to show the 2009-2015 rally and how the Dow dropped down to the bottom of the channel last August. The bounce into the November high was at the midline of this up-channel, a common rebound/failure point, and then this month's decline has seen a break below the bottom of the up-channel. This is a significant break and it's a very strong sell signal following the completion of the 2009-2015 bull market. Notice too that the January decline has also dropped price below the trend line along the highs from 2000-2007, which I'm interpreting as the top of a large expanding triangle continuation pattern off the 2000 high (the bottom of the expanding triangle is at the bottom of the chart). The bearish interpretation of the price pattern calls for the Dow to continue lower into the fall, potentially getting down to the 13K area before setting up a rally into the end of early 2017 to a lower high and then hard down next year.

Dow Industrials, INDU, Weekly line chart, 2008-present

The weekly chart of the DOW below zooms in closer to part of another parallel up-channel which is based on a trend line along the highs since May 2011 and a parallel line attached to the October 2011 low. The difference with this chart is that it's drawn on a log scale chart. You can see the August low almost made it down to the bottom of the channel and the January decline did make it down to the bottom. Once the bounce off last week's low is finished (I'm only expecting a bounce, not a new rally but that's yet to be proven) we should see the Dow drop below the bottom of the channel and act as resistance on a subsequent bounce correction. As depicted on the chart, I'm looking for the market to stair-step lower in a pattern similar to what I'm showing. If the Dow gets above 16600 I'd turn at least neutral.

Dow Industrials, INDU, Weekly chart, 2014-present

The daily chart below shows the daily red and white candles, which clearly indicates a confused market. I've been expecting a higher bounce pattern and I'm sticking with that for now but it means the market should rally on Thursday, perhaps after this afternoon's selloff continues a little lower Thursday morning. Watch carefully if the Dow makes it back up to its 20-dma, currently at 16500 but coming down fast, since it could be the limit of its bounce correction.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,600
- bearish below 15,300

The SPX daily chart below shows the same expectation as for the Dow -- another leg up for its bounce off last Wednesday's low is what I'm looking for, but the risk for those long the market (and wannabe shorts) is that the bounce completed today and now we'll start the next leg down sooner rather than later. I like a February 1 turn date (Fibonacci cycle) and so far the price pattern is supporting that idea. As with the Dow, we could see the 20-dma, currently at 1940 and dropping, act as resistance, otherwise a bounce up to the bottom of a previous down-channel, near 1950, makes a good upside target. That would also be a test of the bounce high on January 13th (the previous 4th wave in the leg down from December 29th) and a 50% retracement of the December-January decline, at 1947.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1950
- bearish below 1820

Without getting too detailed about the short-term pattern following last Friday's high, it would look good as a completed correction at a price projection at 1864 but might find support at price-level support at 1867 (August 2015 low). That makes 1864-1867 a good downside target, if reached, for an opportunity to trade the long side into Friday (I would not hold long over the weekend). From 1864 we'd have a projection to 1960 to achieve two equal legs up from last Wednesday's low. But a 62% projection for the 2nd leg up would be near 1924 and that's the first upside target I'd look for. The potential for a move up to 1950 would be in the middle of the two projections. But if SPX drops much below 1860 I'd start to think a little more immediately bearish (certainly not bullish).

S&P 500, SPX, 60-min chart

I've been watching the two uptrend lines, from June 2010 - November 2012 and March 2009 - August 2015, since the NDX first tested the upper one (from June 2010) on January 14th. Those lines are currently near 4168 and 4126. The short-term pattern looks like we should see lower prices tomorrow morning but I wouldn't be surprised to see an immediate turn back up in the morning (for a typical reversal of the post-FOMC move). Whether it's right away or after another poke lower in the morning, the short-term bullish pattern calls for another leg up to give us a larger a-b-c bounce off last Wednesday's low and then another leg down, possibly for just a test of the low or perhaps a little lower before setting up another bounce.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4478
- bearish below 4050

The daily chart of the RUT shows the alternating red and white candles since last Friday and in a narrowing trading range. Last week's rally has been followed by a sideways consolidation in what looks like a bullish continuation pattern. This points to another leg up and the first upside target, and potentially strong resistance, is 1040, although two equal legs up from January 20th points to 1060. But I'm looking at price-level S/R at 1040 (October 2014 low) and slightly below that is its broken uptrend line from March 2009 - October 2011, near, 1036, the top of a parallel down-channel for its decline from November 30th, near 1032, and the bottom of a previous down-channel for the initial decline from June, near 1029. In other words, there's a landmine of resistance levels between 1029 and 1040, any one of which could blow up in the bull's face. But it also means the RUT would be more bullish above 1040, in which case I'd look for a run up to 1060, if not price-level S/R near 1080.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1040
- bearish below 967

Money has rotated into Treasuries as the stock market sold off and that has lowered yields, which should continue if the stock market is to work its way lower. Assuming yields head lower I see the potential for TNX to drop down to a projection at 1.729% for two equal legs down from June 2015, perhaps a little higher at the uptrend line from June 2012 - January 2015, near 1.77% by the end of February. There will time to evaluate the pattern if and when it gets down there but for now I'm expecting that decline to be followed by another bounce up to the top of its sideways triangle before dropping much lower into the end of the year and 2017. This differs slightly from the longer-term projection I'm showing for the stock market, which don't always trade in synch but often enough to pay attention. But that's later and for now they're both in agreement with an expectation for lower into February.

10-year Yield, TNX, Weekly chart

The banks have been relatively weak this month and that's saying a lot. It's actually been very weak since its December 4th high and there's a good chance we'll see it stair-step lower with the broader market. There's a price projection for the leg down from November, at 55.99, where the decline would be 162% of the July-August decline. But above that level are other potential support levels, at 57.25 and 58.83. The higher level is the April 2010 high and the 38% retracement of its 2007-2009 decline is at 57.25. BKX nearly tagged its 62% retracement last July, at 81.65 (with a high at 80.87), tried to hold support in August-October at the 50% retracement, at 69.45, and now appears to be heading back down to the 38% retracement at 57.25. At the same level is its uptrend line from March 2009 - October 2011 and I would expect this level to be a good downside target and strong support. Notice today's rally failed with a back-test of the bottom of its broken down-channel from July.

KBW Bank index, BKX, Daily chart

The U.S. dollar has been slowly chopping its way up from its December 15th low, which has it looking like a corrective bounce and should turn back down at any time. An uptrend line from December 15th was tested today so a drop below today's low at 98.74 would be the first sign that it could head down to at least 96.56 for two equal legs down from its December 3rd high and likely down to the bottom of its trading range since March 2015, near 95.

U.S. Dollar contract, DX, Weekly chart

Gold is working its way closer to an upside target zone I've been watching for, at 1133-1142. The top of its parallel up-channel for the bounce off its December 3rd low intersects its downtrend line from October 2012 - January 2015 near 1133, which is where its 200-dma is currently located. There's price-level S/R near 1142, which would be a test of its 50-week MA. Once this bounce completes I'm expecting another leg down, perhaps only to its trend line along the lows from December 2013 - July 2015, near 1030 by March, but potentially down to 1000 or below.

Gold continuous contract, GC, Weekly chart

Silver got a little higher bounce this week than I expected to see (it was looking like it would stay inside a sideways triangle) but the pattern off the December 14th low continues to look like a correction to the previous decline. The rally has it testing the top of a parallel up-channel for the bounce (bear flag) and looks ready for a turn back down, otherwise the next resistance level is not until its downtrend line from July 2014 - May 2015, which coincides with its 200-dma, currently at 15.16.

Silver continuous contract, SI, Daily chart

Last week oil dropped down to 26.19, 21 cents below the 26.40 price target I have had on my chart for a long time (for two equal legs down from 2008 in percentage terms). It was also good for a test of price-level S/R that's been traded around since 1984 and was last used support in 2003. So is that it, time to get long? Hmm, maybe not but it could also be late in the game to get short. Ideally I'd like to see a 5-wave move down from last June, although I can make the argument that the 3-wave move down was the last of larger 5-wave move down in an ending diagonal. The bottom line is that I'm watching carefully for bullish signs with an impulsive rally off the low (too early to tell). The first thing oil needs to do is get back above the trend line along last year's lows, currently near its January 2009 low at 33.20. If price consolidates for a bit we could see another leg down toward 20. But the bullish divergence since January 2015 is warning oil bears to be careful.

Oil continuous contract, CL, Weekly chart

Tomorrow's pre-market report on Durable Goods Orders is expected to show more signs of a slowing economy but any upside surprise could spark a rally.

Economic reports


The stock market has been mimicking oil and that could continue since the strong decline in commodity prices and energy-related stocks has finally caught the attention of the stock market. If oil can get above resistance at 33.20 I would expect the stock market to also rally. They're not tied at the hip but at the moment they're trading in synch.

A pattern for the stock market, off last Wednesday's low, looks like a good setup for another rally leg, perhaps after a new low Thursday morning (but a new low is not required). Many times we'll see the Thursday after the FOMC announcement reverse the direction of the post-FOMC reaction. That and the pullback pattern from last Friday suggests another rally leg is coming. But SPX below about 1858 would have me thinking more immediately bearish. Assuming we'll get another rally leg into Friday/Monday, to complete a 3-wave bounce off last Wednesday's low, it will be a good setup to look for a short entry since we should get another leg down to new lows into the first or second week of February. I do not see enough evidence yet that suggests we should be looking for a stronger rally. Instead I'm looking for just a correction to the December-January decline and then lower.

AMZN reports after the bell on Thursday and there are rumors that the company is going to disappoint big time. Of course there have always been and probably always will be rumors about the demise of AMZN's stock price but just keep in mind that it's an important sentiment indicator and sentiment is turning sour. A bad reaction to AMZN could have significant ramifications for the broader stock market.

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

Keene H. Little, CMT

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

New Plays

Think Long Term

by Jim Brown

Click here to email Jim Brown
Editor's Note

Everyone knows oil prices are probably going lower but they will not stay low because under $30 is not profitable for producers and they will halt production. It is inevitable that oil prices will go higher long term.

We are going to try and capture that first real rally in crude that should begin in May or earlier if a production deal is reached between Russia and OPEC. You saw how prices spiked on just the rumor. If a real deal was announced we could see $50-$60 easily by the end of the year.


USO - US Oil Fund ETF

The USO ETF attempts to reflect the performance of West Texas Intermediate crude oil. The ETF invests in futures contracts for oil, diesel, heating oil, gasoline, natural gas and other fuels traded on the Nymex in an effort to track WTI and avoid futures roll over bleed.

Typically, a futures oriented ETF buys forward contracts. As those contracts expire, the funds are rolled over into the next series of futures contracts at higher prices. This causes a disconnect between the actual price of the underlying commodity.

The USO attempts to reduce that as much as possible by spreading the terms and types of futures contracts it holds.

If you are still reading this you are probably wondering why I am recommending a somewhat perishable ETF on oil when we all expect oil prices to go lower. Good question!

Yes, oil prices "should" go lower as inventories build over the next two months. However, the entire world of professional investors understands this but prices have spiked twice in the last week on rumors of a Russian - OPEC agreement to cut production. If such an agreement was actually reached, we could see prices back over $50 very quickly.

I am proposing we try to buy the USO on the next dip on the chance that an agreement will eventually be reached. Last week it traded down to $7.92. When oil was $38 in December the USO was $11. If we can buy it in the $8.50 range we could see a 30% gain on any deal announcement and even more once oil prices reacted to the change in production dynamics.

Obviously, we cannot predict that a deal will happen. Saudi Arabia and Russia are enemies. However, they both have the same problem and that is they are hemorrhaging cash. In July 2014 when oil prices were $105, Saudi Arabia was taking in about $1.06 billion a day in revenue. Today at $30, they are receiving $303 million. That is a loss of $757 million a day, every day, and the kingdom is suffering from it. Russia is losing about $650 million a day. They both have millions of reasons to put their differences aside and reach an agreement.

While we cannot guarantee this will happen the headline chatter is growing daily. They may not be ready to call a truce just yet but together they are losing more than $1.4 billion a day. That is a huge incentive to do something. The next regular OPEC production meeting is early June. I am recommending we buy the USO on the next dip and hold it until July. I cannot imagine OPEC continuing the madness past the June meeting and they are likely to hold an emergency meeting earlier if crude drops back into the $20s again.

Typically, prices rise when inventories begin to decline in late April as refiners ramp up production for the summer driving season. Even if Russia and OPEC do not reach an agreement, we should see a rise in prices starting in May or earlier.

I am not going to try to buy the bottom because we may not see it again. I am recommending we buy the USO at $8.50 and hold it with no stop loss because it could go lower. I believe we will be rewarded over the next few months and with the right set of circumstances, we could be very well rewarded.

With a USO trade at $8.50:

Buy USO shares no stop loss.


Buy USO July $10.00 calls, currently $1.03. No stop loss.


No new bearish plays

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Jim Brown

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In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown
Editors Note:

The market rebounded off the opening lows to trade in positive territory before the FOMC announcement. The Dow moved from -164 to positive +65 before the Fed's trapdoor opened under the market and it collapsed back to -291 just the close.

The Fed's statement was dovish but not dovish enough. There was just enough change in tone to suggest the Fed might know something that we do not. They said they are no longer confident inflation is going to rise. The implication there is that the opposite of inflation is deflation. They did say again that the impact from oil prices would be transitory.

The warned they would "monitor the global situation closely" suggesting they were beginning to become concerned about Asia.

I wrote yesterday that the Pre Announcement Drift would probably lift the markets ahead of the announcement but after the event the market was likely to pick a direction and move quickly. That clearly came to pass and now we are faced with the "what now?" question.

The Dow has now moved more than 200 points per day in opposite directions for the last four days. We have not yet picked a direction after the three-week decline to start the year.

Current Portfolio

Current Position Changes

No Changes in Existing Positions

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

BULLISH Play Updates

SWHC - Smith & Wesson

Company Description


S&W dropped at the open in a negative market and tried to recover intraday before the trap door opened under the market in the afternoon to take S&W back to its lows. There was no company specific news.

Original Trade Description: January 21st.

Smith & Wesson is a gun manufacturer. Business has been very good but they announced this week they are looking for some acquisitions in other outdoor areas so their business is not so tied to the cycles in gun sales. Whenever an administration begins talking about more gun control measures their sales soar. When there are no politicians trying to ban guns we see sales decline.

The current administration has been the best for gun sales since the Clinton assault weapons ban. The FBI said the increase in the number of background checks for gun purchases has been so strong that their system is overloaded and they have had to halt appeals for denials until they can add some more personnel.

December saw a record of 3.3 million background checks, which was more than 500,000 above the prior record for December in 2012. On Black Friday alone there was a record 185,345 checks and a new single day record.

While this surge in gun sales has powered Smith & Wesson to record profits the company realizes that the election of a pro gun administration will slow those sales. For this reason S&W announced this week they were looking into getting into the $60 billion outdoor sporting goods market. They will likely be trying to acquire brands that they can add to their lineup that are not directly related to guns.

S&W said they were on the hunt for candidates but did not have any announcements at the current time.

This is a good move for S&W for obvious reasons. By branching out into other products, it will also help widen the S&W brand even if those new products have their own brand names.

Shares spiked to record highs over $26 when they reported earnings in early January. The post earnings depression appears to be over and shares dropped back to support at the 100-day average. This is a good spot for people to launch new long positions and once the current market weakness is over the small cap stocks like S&W with strong growth will be in demand.

Earnings March 8th.

Position 1/25/16:

Long SWHC shares @ $21.35, see portfolio graphic for stop loss.


Long June $23 call @ $1.75, see portfolio graphic for stop loss.

UFPI - Universal Forest Products

Company Description


Another day, another reversal. UFPI has been averaging more than 3% per day in opposite directions and following the broader market. Short term support is holding.

Original Trade Description: January 16th

UFPI recently experienced a -20% pullback from its December 2015 highs but shares are still trading at levels not seen for almost ten years. More importantly it appears that the correction is over.

UFPI is in the industrial goods sector. According to the company, "Universal Forest Products, Inc. is a holding company with subsidiaries throughout North America and in Australia that supply wood, wood composite and other products to three robust markets: retail, construction and industrial. The Company is headquartered in Grand Rapids, Mich., and is celebrating its 60th year in business."

The big surge in the stock in mid October was a reaction to the company's Q3 earnings report. It was a record-breaking quarter for UFPI in spite of a -17% drop in the lumber market. Here is an excerpt from the company's earnings press release:

"UFPI announced record-breaking 2015 third-quarter results. The Company posted the best third-quarter earnings in its history with net earnings attributable to controlling interests of $25.6 million, an increase of 32.9 percent over the same period of 2014. It also posted the highest year-to-date net earnings in its history, at $61.7 million. Earnings per diluted share were $1.26 in the third quarter of 2015, up from $0.96 in the third quarter of 2014. Net sales of $762.3 million for the third quarter were up 6.8 percent over the same period of 2014."
The stock has been trading very technically with investors keying in on support and resistance levels. Shares of UFPI did see a rough December after a downgrade on December 8th. However, after a -20% pullback investors started buying UFPI last week. That is noteworthy since the broader market was crashing lower last week. You'll notice on the daily chart that UFPI found support at its simple 200-dma and delivered a pretty good gain for the week.

We think this bounce continues and want to hop on board. There is very short-term resistance at $67.00. Tonight we are listing a trigger to launch bullish positions at $67.15. Investors may want to limit their position size to reduce risk since UFPI has proven itself to be somewhat volatile.

FYI: UFPI does have options but the spreads are too wide to trade them.

Position 1/19/16:

Long UFPI stock @ 67.37, see portfolio graphic for stop loss.

BEARISH Play Updates

KRE - SPDR S&P Regional Banking ETF


Regional banks were up this morning on higher oil prices and expectations for some positive Fed comments on rates. When that did not happen, they retreated in the afternoon.

Original Trade Description: January 25th

We were knocked out of the long position on this ETF with the drop below support this morning. The keywords in that sentence were "drop below support." Typically, when long-term support breaks we are looking at a continued decline that could be material.

Regional banks are tanking because of their loans to energy companies and to firms that service those energy companies. That includes restaurants, service stations, apparel stores, mom and pop businesses of all types that catered to the families of the 150,000 energy workers that have been laid off.

In addition, the U.S. manufacturing sector is in recession. With energy, manufacturing, transportation already in recession the odds are increasing that the country is going to be headed in that path as well.

Today, the Texas Manufacturing Outlook Survey for January fell from -20.1 to -34.6 and the lowest level since 2008. The outlook for the U.S. economy is not good and that means regional banks could be facing rising defaults.

I hate to go straight from a long position to a short position but in this case, the situation appears to be right. We entered the long position on a dip to support at $35. There was an immediate rebound but then that support failed today based on economic news.

I am recommending we short the KRE ETF with a tight stop at $36.45.

Position 1/26/16:

Short KRE @ $34.38, stop loss $36.45.


Long March $33 put @ $1.15, stop loss $36.45

OIH - Oil service Index

ETF Description


Another short squeeze in WTI faded in late afternoon. There were continued rumors of a pending deal between Russia and OPEC despite claims by two Russian officials that there were no talks with OPEC. However, the Russian energy minister said he discussed a possible deal with OPEC at a meeting with Russian oil companies. Whom do you believe? The guy trying to talk up oil prices or the government officials that said there were no talks.

Original Trade Description: January 20th

The OIH ETF represents 25 oil service stocks including Schlumberger, Halliburton and Baker Hughes. Once you get past those three largest holdings the rest of the pack has little balance sheet strength and we could easily see multiple bankruptcies or credit defaults. The bottom of the list contains Tidewater (TDW), Carbo Ceramics (CRR), Seadrill (SDRL), etc. The risk of default is high for the bottom half of the list. View Full List

The "perceived" bounce in oil prices by shifting to a new contract at $28.81 instead of the $26.55 close may cause some investors to buy energy stocks in a knee jerk reaction. Do not be fooled. The bottom in oil prices is still ahead.

The API Inventory report tonight after the close showed a larger than expected gain of 4.6 million barrels of oil and 4.7 million barrels of gasoline. The more accurate EIA inventory report comes out at 10:30 on Thursday.

The inventory build season runs from January 6th to the end of April. Last year inventories rose a whopping +106 million barrels to record levels during that period. There is not likely to be another rise like that because there is very little available storage capacity in the USA. Canadian oil is now selling for $15 below WTI because all the Midwest storage locations are virtually full. Bakken oil is selling for $8-$10 below WTI prices for the same reason plus transportation is expensive to other locations.

I believe we will see WTI at $25 or below over the next two months and possibly even $20 because of the price pressure from the Iranian oil sales. They have about 50 million barrels stored on tankers and that oil is now available for sale. Prices are going lower.

This will probably drag the equity market lower as well but eventually there will be a disconnect between equities and oil prices at some level. The constant headlines about lower oil prices will eventually become old news. Of course, key levels like $25, $22, $20 could cause some additional market weakness.

Energy stocks will continue to react to the low oil prices because every dollar of decline is very painful and impacts their ability to service debt and keep the doors open. Analysts claim as many as 50% of the U.S. producers could default or worse if prices remain low for very long.

I am recommending we short the OIH and expect to hold the position until April. The plan will be to close it about the time inventories top out in early April. We could see a minor uptick at the open on Thursday because of the new front month contract. When inventories are announced at 10:30 we should see a decline in WTI if they are high as expected.

Position 1/21/16:

Short OIH shares @ $21.26, see portfolio graphic for stop loss.


Long July $20 put @ $1.92, see portfolio graphic for stop loss.

SSYS - Stratasys Ltd

Company Description


Strong relative strength with a loss of only a penny in a bad market. However, when markets are down hard the trash stocks are bought under the assumption they are already down and represent relative safety.

Original Trade Description: January 22nd.

Stratasys is a maker of 3D printing systems and parts. The company makes parts for other equipment using its proprietary 3D printing systems. They manufacture for sale production systems under the Dimension, Objet,Fortus, Polyjet, SolidScape and MakerBot brands.

While the 3D printing business is expanding in scope and acceptance all around the world the excitement over 3D stocks has faded. XONE, DDD and SSYS shares have been fading since their peaks back in 2013. Stratasys closed at a new six-year low on Friday despite a minor rebound with the rest of the market.

I debated which 3D stock to short and picked SSYS because of the identifiable trend and it has farter to fall than competitor 3-D Sys Corp (DDD). That stock is cheaper at $7.41 if you would rather have less at risk.

The decline in Stratasys accelerated since mid December. There have been two small rebounds along the way. I see the rebound from the 6-year lows last week as an opportunity for a short at a higher level. This gives us an obvious stop loss at $19.50 and the odds are good we will see a new low in the weeks ahead.

Update 1/26/16: The stock was downgraded by JP Morgan from buy to neutral. JPM said demand for the parts that DDD and SSYS make is dying and competition is fierce. They cut the price target to $19. UBS cut expected earnings in half for SYS to 30 cents. The bank cut the rating to sell and price target to $16. Earnings are March 2nd.

Position 1/26/16:

Short SSYS shares @ $17.45, initial stop loss $19.50


Long March $15 put @ 95 cents, initial stop loss $19.50

VXX - VIX Futures ETF


VXX rebounded slightly in a very negative market but failed to push through resistance at $26.30. Be patient. The volatility will eventually die.

Original Trade Description: August 24, 2015

The U.S. stock market's sell-off 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 a 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.

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.

Position 8/25/15:
Short VXX @ $21.82, no stop loss.

Second Position 9/2/15:

Short VXX @ $29.01, no stop loss.

Trade History
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

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