Option Investor

Daily Newsletter, Wednesday, 3/2/2016

Table of Contents

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

Market Wrap

End-of-Month/New-Month Bullish Pattern Holds

by Keene Little

Click here to email Keene Little
A pattern of price gains into the end of the month and then into the first or second day of the new month has held again. This pattern also suggests the market might not hold onto those gains in the next week or two so we'll soon find out if the pattern will continue or not.

Today's Market Stats

The end-of-month rally that typically leads into a beginning-of-month rally has once again played out and now we're left to wonder what will follow the strong rally off the February lows. It's easy to feel bullish looking at the daily charts but the intraday charts are showing reasons for worry as the volume in the rally is less than what we saw in the decline and we're seeing waning momentum (bearish divergence). As we head into Friday's pre-market nonfarm payrolls report it will be interesting to see how the market reacts.

Much of the trading today is done by program trading (about 80%) and much of that trading is done by large hedge funds. These funds derive a good portion of their income based on their assets under management (AUM), such as 2% of AUM and 20% of gains (they don't give back the 20% if they lose money). It's to their advantage to have their AUM at as high a level as possible at the end of each month so that they can bill their clients 2% of the asset value. It's no coincidence that there's typically an end-of-month rally to get the AUM as high as possible.

February ended at the highest level since the end of January, which was the highest level since the end of December, which was the highest level since December 1st, which was the highest since November 3rd. These end-of-month rallies, into the first day or two or three of the new month, are typically followed by a swoon into mid-month as these buyers step away and then come back in later in the month to start all over again. Rinse and repeat, collect 2%. Many times these "AUM drives" begin in opex week. So with the rally from February 11th looking a little tired I'd be a little careful chasing the market higher from here.

Today's economic reports included the ADP Employment Change report in the morning and the Fed's Beige Book this afternoon. The employment report came in a little stronger than expected -- 214K jobs added vs. expectations for 190K and a slight improvement over the +205K jobs added in January. It was a positive sign for the economy but not too strong to scare the Fed into thinking they'll have to move faster on the next rate increase. The futures market barely reacted to the pre-market news.

The Fed's Beige Book showed U.S. economic activity slowly expanding from early January through February but not smoothly. There was a large variation across different regions and within the different sectors. Consumer spending increased in a majority of the districts but manufacturing continued to lag behind other sectors. The strong dollar continues to get the blame for deteriorating export business while the decline in demand from the energy field is hurting many ancillary businesses that feed this sector. While the employment picture continues to look stable there is some concern that wage growth "varied considerably."

The report noted consumer prices were generally flat and it makes it more difficult for the Fed to justify another rate increase. There is concern that a global slowdown will drag the U.S. economy down as well and without inflation ticking higher it's going to be difficult for the Fed heads to argue for a rate increase at this time. The market likes that and the added rally this afternoon was likely a result of thinking the Fed will be forced to stand on the sidelines. Of course the reason for the Fed not being able to raise rates is exactly why the market should not be rallying but that point seems to be absent from most investors' thinking.

Not showing up in the Fed's Beige Book is a discussion about U.S. small-business activity, which is slowing. As the biggest driver in employment this is worrisome. The Thomson Reuters/PayNet Small Business Lending Index dropped significantly, down -13% in January to its lowest level since November 2014. This is a measure of borrowing by small businesses and according to Bill Phelan, the president of the loan-information company PayNet, this level of borrowing is insufficient to replace old equipment, let alone buy more. As Phelan reported, "This is a dramatic form, an extreme form of hunkering down."

Along with other signs of contraction that we're seeing for the economy, Thomson Reuters notes the PayNet index is "a strong leading indicator for U.S. economic growth one or two quarters down the road." This makes sense, since small businesses account for a huge portion of U.S. economic activity. If they're struggling, the broad economy is likely to follow. This will of course continue to make it difficult for the Fed to justify a rate increase -- no/slow growth and no/slow inflation growth will necessarily keep the Fed on the sidelines. The conditions are not good for the stock market either but for now it continues to be focused on the Fed to the near-exclusion of all else. The market has its back to the woods and the bears are sneaking out to attack...

Now that we've had a strong bounce off the February lows, with many of the indexes having retraced 50% or more of the December-February decline, it has turned many analysts bullish again on the stock market. If my assessment of the market's decline is correct, which is that it's the first leg down of a new bear market, then the bounce off the February low is just a correction to the decline and it will be followed by a drop to new lows. The first correction typically gets traders feeling very bullish at the worst time since the next leg of the decline if often the stronger one. It remains to be seen whether or not this pattern will play out but at the moment I think it's risky to chase the market higher. However, the indexes are also close to proving the bounce is something more bullish than just a correction and we should get a better idea in the coming week who will win the battle.

S&P 500, SPX, Weekly chart

With the assumption that the bounce off the February 11th low is a correction to the December-February decline and not the start of something more bullish, there are some key levels that will seriously jeopardize that assumption. If SPX rallies above price-level S/R at 1992 I'd turn more neutral and if it can rally above its 200-dma, near 2024, and its 50-week MA, near 2033, I'd turn more bullish. If it can rally above 1992 and hold that level on a back test I'd also turn more bullish. But for now, until proven otherwise, the February bounce should lead to a stronger decline in a new bear market and the next leg down could be very strong -- down to the June 2007 high at 1576 by June, followed by a bounce before continuing lower into the fall, potentially down to the May 2011 high at 1370 (to set up an end-of-year election rally).

S&P 500, SPX, Daily chart

The daily chart of SPX is not showing any signs of topping and therefore it's telling bears to be cautious about shorting the bounce. There is no bearish divergence on the daily chart for the rally from February 11th, which is not required for a top but it helps signal an end to the move. But a broken uptrend line from January 20 - February 3 has been holding back the rally and it currently crosses price-level S/R at 1992, which is also the 62% retracement of the December-February decline. That makes 1992 an important level for the bulls to break through. The next level of resistance above 1992 is the 200-dma, near 2024, and then the 78.6% retracement (a favorite retracement level for this market) at 2041. A rally above 2041 would be a strong indication we'll get new all-time highs. But the bounce pattern off the February low looks like a correction and that has me looking for evidence for where it will end since the next leg of the decline should be a strong one and therefore a good opportunity to short it.

One important note about yesterday's strong rally -- it was the strongest rally since January 29th and August 27th before that. Both of those days led to only small gains the following day and then either a significant pullback (into September) or a new low (into February). In other words the strong rally was more of a blowoff move (short covering) than something more bullish. You'll find the strongest rallies in a bear market, not a bull market. Today's rally produced a small gain so if the pattern is to repeat we'll have a down day tomorrow. If it doesn't decline but instead closes above 1992 then we'd have a bullish statement from the market.

Key Levels for SPX:
- bullish above 1992
- bearish below 1891

S&P 500, SPX, 60-min chart

The 60-min chart below shows a rising wedge pattern for the bounce off the February 11th low and bearish divergence at the highs since February 17th, which helps confirm the bearish interpretation of the pattern. Today's rally was holding at the top of the wedge until a quick pop above it with a small jam higher into the close. A decline tomorrow would leave a small throw over above the top of the wedge, which is a common way for the pattern to finish. But a rally above 1992 would effectively negate the bearish wedge and that in turn would be a strong bullish signal. We should find out quickly Thursday morning which way this is going to go.

Dow Industrials, INDU, Daily chart

The Dow's daily chart looks like SPX as it presses up against its broken uptrend line from January 20 - February 3 and price-level S/R near 16900, which was this afternoon's high. The day following Tuesday's big rally finished with a bearish hanging man doji at resistance, which needs a red day on Thursday to confirm the reversal pattern. But if the bulls press this higher on Thursday, the next level of resistance is the 62% retracement of its December-February decline, at 16985, and then its 200-dma, near 17195. Not shown on its daily chart, there are two internal price projections, based on the wave pattern, for the bounce off the February low, both of which point to the 16900 area for an upside target. Having achieved its upside target at price-level resistance and with short-term bearish divergence and overbought conditions it's a very good setup for the bears. We'll find out quickly on Thursday whether or not the bears are paying attention.

Key Levels for DOW:
- bullish above 16,900
- bearish below 16,165

Nasdaq-100, NDX, Daily chart

It's hard to see on the NDX daily chart below but today's candle is a hanging man doji, like the Dow, and following yesterday's big rally it could be a reversal pattern in the making. A red candle for Thursday would confirm the reversal pattern but as long as it stays above the 50% retracement at 4321 it remains bullish. The next level of resistance is near 4420, where it would retrace 62% of its December-February decline, achieve two equal legs up for its bounce off the February 11th low and test its 200-dma. Needless to say, that will be a tough level to crack if NDX continues to rally up to there. The 5-wave decline from December into February is what strongly suggests the bounce off the February low is not a new bullish leg but instead is a correction to the decline. That's the reason I'm looking for a top to the bounce to get short. It might lead to only a pullback in what will become a larger a-b-c bounce pattern but the more immediate bearish potential is for a decline to new lows from here.

Key Levels for NDX:
- bullish above 4325
- bearish below 4088

Russell-2000, RUT, Daily chart

The RUT was a strong leader to the upside today and that's bullish. Whereas the other indexes rallied roughly +0.3% (flat for NDX, +0.4% for SPX) the RUT was up +1.1% and as long as the RUT leads to the upside it will be good for the market. Rallying above strong resistance near 1040 yesterday, along with the bullish follow through today, tells bears to be very cautious trying to pick a top. The next level of resistance, if reached, will be 1074 (a 50% retracement of its December-February decline) and then price-level S/R near 1080. A drop back below 1040 would be a bearish heads up.

Key Levels for RUT:
- bullish above 1040
- bearish below 996

10-year Treasury Note emini, ZN, Weekly chart

I typically follow the Treasury yields but following bond prices is essentially the same, except for the inverse relationship. I noticed an interesting setup on the 10-year Note emini contract (ZN), which is shown on its weekly chart below. The rally in bond prices from December had ZN breaking its downtrend line from July 2012 - January 2015 in February and it then rallied up to the top of a parallel up-channel for the rally from September 2013. It poked above the top of the up-channel on February 11th and then created a strongly bearish shooting star for the day. That rally has been followed by a drop back down to its broken downtrend line from 2012 and we'll soon find out if it's going to hold as support on a back-test. If the back-test holds and Treasuries start rallying again it would very likely coincide with a decline in the stock market so keep an eye on bonds to help gauge how much the stock market rally, or decline, should be trusted. If ZN drops below 129 it would be supportive of a continuing stock market rally.

KBW Bank index, BKX, Weekly chart

A bounce pattern for the banking index, BKX, would have two equal legs up at 64.68 (for an a-b-c correction to its decline) and at the same level it would back-test its broken 200-dma and broken 50-week MA, both currently at 64.67. That should be tough resistance if reached. But if the buyers rally BKX above 64.68 they wouldn't run into the next strong resistance level until about 66.50. As with the other indexes, the risk following the bounce off the February 11th low is for a strong decline to a new low but at the moment I can't rule out the possibility for just a pullback this month and then higher into April for a larger a-b-c bounce off the February low.

Transportation Index, TRAN, Daily chart

The Transports have had a strong recovery off the January 20th low, with practically no pullback along the way. The TRAN could retrace 62% of its November-January decline, at 7611, if the buyers can keep at it this week. The bounce off the January low would likely be complete if it drops back below 7100.

U.S. Dollar contract, DX, Weekly chart

There's not much to add about the US$ as long as it continues to trade inside a 94-100 price range. Short term there is a down-channel for the pullback from December, the top of which was nearly tested with today's high at 98.59 and the intraday pattern looks like the bounce could be ending at any time. Another trip back down toward 95 could be the next move but it would look more bullish if it can rally above its January high at 99.95.

Gold continuous contract, GC, Weekly chart

Gold's daily chart shows a sideways triangle consolidation pattern following the February 11th high and that looks like a bullish continuation pattern. As long as it holds above the February 16th low, at 1191.50, it's looking like we'll see another leg up for gold, which is what I'm depicting on its weekly chart below. Another rally would break gold out of its down-channel from 2013 but I think it will turn into a fake-out breakout and catch too many gold bulls leaning too hard to the long side. But if a rally can break above its January 2015 high at 1307.80 I'd turn more bullish, especially if a pullback holds at/above the top of its down-channel, currently near 1255.

Oil continuous contract, CL, Daily chart

Oil's daily chart below shows an a-b-c bounce pattern off the January 20th low and it achieved two equal legs up at 34.68 (with a high so far at 35.17). If it's to be just a correction to the decline, which fits as a 4th wave in the leg down from June 2015, then there's another leg down coming, which would be the 5th wave. The downside projection for a 5th wave would be near 20, possibly by early April, and if that happens it would be a very good setup for a stronger bounce/rally in oil. But at the moment the bounce pattern off the January low looks corrective, like the stock market, and that keeps the downtrend intact. Only with a rally above 38 would things start to look more immediately bullish for oil.

Economic reports

Thursday morning's economic reports include the unemployment claims numbers, productivity, labor costs and ISM Services. None are market moving but some of the data will be used by the Fed in their evaluation of inflation risks (although at this point to say inflation "risks" is probably not correct since the Fed would dearly love to see higher inflation, even above 3%). Friday morning's NFP report will be the big one and after today's ADP report there could be some whisper numbers looking for 200K instead of 180K. Just not too strong so that the Fed can stay on the sidelines.


Following Tuesday's strong rally and more or less a consolidation day today (except for a more bullish RUT) there is a pattern from last August and January that suggests we could see a turn back down. Combine this pattern with the end-of-month "AUM" rally, which typically leads to a decline into mid-month and we have a setup for at least a pullback following the strong bounce off the February lows.

But if the market does not start a more significant pullback on Thursday, Friday at the latest, we'll have a market that's speaking bullishly to us. We could simply get a bigger bounce that corrects the December-February decline before heading lower but there is a bigger bullish pattern that calls for another rally leg to new all-time highs. It's the more bullish possibility that is reason enough for bears to be cautious here.

Since this is a setup for at least a deeper pullback into mid-month, and potentially something much more bearish, I think it's very important for bulls not to get complacent. If you missed your opportunity to lighten up on your exposure to the long side and you were kicking yourself for not selling sooner, this is your second chance. A much stronger decline would have you kicking yourself that much harder. Set your stops now and don't let the market get past you. Enjoy the ride higher, if that's where we're going, but protect yourself on the downside.

We have as good a setup for shorting the market as you'll see and a negative close on Thursday would be the trigger to play the short side (sell rallies).

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

Catch the Wave

by Jim Brown

Click here to email Jim Brown
Editor's Note

With oil prices suddenly rising despite record inventory levels it appears investors are suddenly heading back into the energy sector. The various oil stocks are showing significant gains over the last couple days but there is still the potential for trouble ahead. If record inventory levels lead to a lack of storage space the price of crude could dip sharply at any time. That dip would be brief but it is a possibility.

Also, individual oil companies are wrestling with their balance sheets and fighting negative cash flow. The answer is to sell assets or issue new shares since banks are not in a lending mood right now if you are not sitting on gold bars as collateral.

Another way to play the eventual rebound in crude prices is with the dividend ETFs. They have been beaten down so far that almost any ETF is a buy. However, some have no ability for growth because of their high debt loads. Rather than single out one individual MLP we will pick the yield leader today.

Because not everyone will want to buy and hold a MLP for several months, I am also recommending a software company poised for a breakout.


AMLP - Alerian MLP ETF - ETF Profile

The MLP sector has been trashed along with the producers even though they have almost no risk. A pipeline MLP is a toll collector. They get paid a fee for every barrel of oil or cubic foot of gas that travel through their pipelines.

The vast majority of the pipelines in the country are full. They are so full that producers are having to resort to truck and rail shipments to get their oil to market. The pipelines are not in any material danger of a sudden drop in petroleum products flowing through their pipelines. Many contracts are take or pay. Producers commit to ship a certain amount of product and they pay for that commitment.

I am recommending the Alerian MLP ETF. This is an ETF that owns an entire basket of MLP securities and they all pay dividends. The AMLP is currently yielding 11.4%. They have raised their dividend every quarter since Q1-2012. They are not likely to break that string and if they did I suspect it would only be by a small amount. The Q1 dividend they announced on Feb 10th was 29.9 cents, payable on February 18th.

There are analysts that believe the MLP model is at risk. They believe the cost of capital will rise with the Fed rate hikes and the crash in the oil market. That means existing MLPs will have to pay more for new assets. That does not affect existing MLPs that already have their assets in place. They do not have to grow in the current energy environment. They can be content to sit on their assets and continue to pay dividends on their existing pipelines.

AMLP Holdings

I believe the risk at the current price level is minimal. The MLP panic has run its course with several cutting their dividends and causing the sharp drops in the ETFs. Now that oil prices are firming and expected to firm even more beginning in April when inventories begin to decline, the MLP ETF buyers will return. Just a year ago AMLP was trading over $20 and could be there again by this time next year.

There is no scenario where oil prices remain low long term. This is a normal boom/bust cycle and they will recover and will trade significantly higher in the years ahead.

This is a LONG-TERM position. Oil prices should rebound starting this summer and then rise sharply in 2017 and you need to be content to collect the 11.4% while we wait for those prices to move higher.

You do not have to hold long term. My initial target would be $14 and that would be a 40% return and we could see that by July.

Buy AMLP shares, currently $10.49. No stop loss.


Buy July $12 call, currently 50 cents. No stop loss.

HDP - Hortonworks Inc - Company Profile

Hortonworks is a software provider that focuses on development, distribution and support of the Hadoop open source project. Hortonworks Data Platform (HDP), an enterprise-grade data management platform that enables its customers to capture, store, process, and analyze increasing amounts of existing and new data types without the need to replace their existing data center infrastructure.

Whether or not you have heard about this platform is immaterial because it is the up and coming thing for big data users. Hortonworks and Hewlett Packard Labs announced a collaboration this week to enhance Apache Spark. Hewlett & Hortonworks

They also announced new streaming analytics capabilities utilizing Hortonworks DataFlow (HDF) powered by Apache Kafka, Storm and NiFi. I hope you know what that means because I do not. DataFlow HDF

I could go on with dozens of new features and functions but the point I am making is that Hortonworks is not dormant and they are a bleeding edge software provider for big data customers.

In the Q4 earnings release they reported subscription revenue growth of +146% and a doubling of customers to more than 800. HDP was founded by a group of ex Yahoo engineers. Revenue in the quarter nearly tripled to $37.4 million. They guided for full year 2016 to revenue of $188 million and gross billings of $261 million.

This is a small company but one that is likely to explode higher or be acquired. Since their earnings on Feb 11th the uptrend has been steady with almost no volatility. Shares are currently at resistance at $12. A move over $12.25 should trigger some short covering as investors project the next resistance at $16.

Earnings are May 12th.

With a HDP trade at $12.35

Buy HDP shares, initial stop loss $10.85.

I am not recommending an option because of wide spreads.


No New Bearish Plays

In Play Updates and Reviews

Dip Bought!

by Jim Brown

Click here to email Jim Brown

Editors Note:

The opening dip after Tuesday's monster rally was bought and the indexes closed in the green with decent gains. This was the perfect scenario and suggests we could see continued gains. Traders bought the dip and were still buying at the close.

The rally in the Russell 2000 small caps powered the index to the biggest gains of more than 1%. The S&P rebounded +8 points to 1,986 as it closes in on the next resistance level at 1,999. This is likely to be a tough level to cross.

We escaped the recent trend of major gains being followed by major losses and that has happened several times in the last two weeks. The trend has finally changed to a bullish bias and the worst should be behind us.

There was no major movement in the portfolio with each stock only trading a few cents away from the flat line. Now with two days of gains we could see a streak develop. The worry over the Nonfarm Payrolls on Friday has lessened after the ADP Employment report came in stronger than expected. This lifted the banks on expectations the Fed could be back in play for the June meeting.

Current Portfolio

Current Position Changes

No Position Changes

Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.

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

ACAT - Arctic Cat - Company Profile


Another two-month high but the gain was anemic. We need another day where the market is strongly positive to get the fire started.

Original Trade Description: February 24th

Arctic Cat makes snowmobiles, all terrain vehicles (ATVs) and recreational off-road vehicles (ROVs). They reported a bad quarter because of the exceptionally warm weather and lack of snow. Sales declined -14.3%. Of that 4.9% was due to the strong dollar. The brand is one of the most wildly recognized brands of off-road equipment.

Arctic Cat has been in a restructuring program for several quarters to revamp their dealer network, eliminate debt, reduce inventory and produce new cutting edge vehicles.

In Q4, they reduced long-term debt by $15.8 million. They suspended the quarterly dividend to save $6.5 million in cash for the restructuring. Inventory decreased -$25 million sequentially. They generated approximately $27 million in free cash flow.

The company expects to see the benefits of their restructuring in the next two quarters with sales expected to rise +40% in the current quarter. New models and new products coming out this summer are expected to boost sales as well. They are announcing a new "single ski" snow bike at the snow dealer show in March.

While the outlook is far from exciting the company shares have rebounded from the low of $9 on January 28th to $16.45 today. The stock momentum is strong and it reached primary resistance at $16.50 this week. If the stock breaks through this resistance it could trigger additional short covering with the next resistance at $22.25. I am recommending a long position on a resistance break and an exit before we reach that higher resistance at $22.

Earnings are May 12th.

Position 2/26/16 with an ACAT trade at $17.25

Long ACAT shares @$17.25, see portfolio graphic for stop loss.


Long June $20 call @ $1.70, see portfolio graphic for stop loss.

CDW - CDW Corp - Company Profile


CDW consolidated the big gain from Tuesday and dropped back to use the prior resistance at the 200-day average as support for the intraday rebound. We need to see a move over $40 to trigger additional buying.

Original Trade Description: February 29th.

CDW distributes IT solutions in the U.S. and Canada through its website CDW.com. They offer hardware and software products to integrated IT solutions including mobile, security, data center optimization, cloud computing, virtualization and collaboration. They offer a full line of IT products of every size, shape, brand, model and configuration. They also offer customization, installation, warranty and repair services as well as infrastructure as a service. This is the IT distributor for the home office, company datacenter or the datacenter as a service for those companies that do not have an extensive IT staff.

CDW has more than 250,000 corporate customers and 1,000 supply partners.

They reported Q4 earnings of 73 cents that rose +23% and matched estimates on revenue that rose +12.1% to $3.42 billion, which beat estimates slightly. For the full year they earned $2.35 on revenue of $12.99 billion.

They also announced a quarterly dividend of 10.75 cents to be paid on March 10th to holders on Feb 25th.

Shares rebounded from the earnings and are trading at $39.50. CDW has a very clear relationship with moving averages, especially the 200-day and the 300-day. Every break of either average has resulted in a significant move. On Monday CDW closed 9 cents above the resistance of the 200-day after trading between the 200-300 for the last two weeks. A breakout over that 200-day should target the $43 level if not higher.

CDW shares posted a 77-cent gain today in a weak market.

The high today was $39.76 and I am going to use an entry trigger at $39.85. That will mean the option price could be a little higher than expected since I am using the $40 strike. The $45 strike is too far away and has no open interest.

Position 3/1/16 with a CDW trade at $39.85

Long CDW shares @ $39.85, initial stop loss $37.85.


Long Apr $40 call @ $1.50, no initial stop loss.

DWRE - Demandware - Company Profile


DWRE posted another minor gain but resistance appeared at $35.75. However, note the very shallow candles intraday today. That suggests a breakout is forming. Let's hope it is to the upside. Shallow candles mean the buyers and sellers are close in price and that normally means the buyers are bumping up against a sellers price but not in enough volume to break through that level. When the seller eventually runs out of stock the breakout can be strong.

Original Trade Description: February 22nd

Demandware provides enterprise-class cloud based digital commerce solutions in the U.S., Germany, UK, and internationally. The Demandware Commerce platform enables customers to establish complex digital e-commerce strategies including multi-brands, multi-site, omni-channel and in-store operations.

Everything is integrated including payment systems, email marketing, campaign management, personalization, taxation, ratings, reviews and social commerce.

Demandware shares were caught in the Tableau Software disaster on February 5th when Tableau warned they saw enterprise spending slowing. Shares crashed from $44 to $30 on the Tableau news.

Demandware reported earnings on the 9th of 38 cents that beat street estimates for 23 cents. Revenue of $75.6 million also beat estimates for $72.3 million. They guided for full year revenue in the $295-$305 million range. Shares dropped at the open the next day because the street was expecting $302.26 million. It was a very minor guidance blink but shares dropped $2 the next day. That was the low for the month.

Shares have rebounded from that $26.50 low to $33.50 because they are not Tableau Software. They did not report any weakness in their earnings and revenue but they were punished for the Tableau guidance prior to earnings.

I believe Demandware will return to the $44 level where the close before Tableau dumped on the cloud software sector.

The high today was $33.97. I am putting an entry trigger on this play of $34.15 to get us over that level just in case the market takes a turn for the worse. If we do get some broad based profit taking, I will modify this play to take advantage of any new dips.

Earnings May 5th.

Position 2/26/16 with a DWRE trade at $34.15

Long DWRE shares @ $34.15, see portfolio graphic for stop loss.


Long April $35 call @ $2.70, see portfolio graphic for stop loss.

GME - Gamestop Corp - Company Profile


Gamestop dropped nearly $2 at the open but the rebound was immediate and shares ended the day with a 35-cent gain. That is a bullish candle.

The company announced the sale of $400 million in new debt due in 2021. The funds will be used for acquisitions, dividends and buybacks. Gamestop is in the process of acquiring two AT&T resellers with a total of 450-500 locations. Moody's assigned the offering a Ba1 rating and said the offering showed Gamestop was "prudently diversifying its business."

Original Trade Description: February 26th.

Gamestop was originally a reseller of used video games. As the business model matured they moved into new games, game consoles and recently into smart phones, tablets, MP3 players, headphones and manner of consumer electronics. They are a certified Apple consumer electronics reseller, an authorized AT&T reseller and Cricket Wireless seller of prepaid cell phones. As of January 31st, they operated 7,100 stores in 14 countries.

Gamestop's death has been reported prematurely numerous times and they just keep reinventing themselves in the expanding market. When more games became downloadable rather than cartridge or CD based everyone thought that was the death knell for the company. Instead they ramped up their sales of consoles and consumer electronics to increase their customer base and store traffic.

Recently they even ramped up their quarterly dividend to 37 cents ($1.44 annually) to yield 5%. Very few companies paying a 5% dividend are in danger of going out of business. The current dividend will be paid on March 22nd to holders on March 9th.

Gamestop will report earnings March 24th after the close and hold a conference call at 5:PM ET. They will also host an investor conference on April 13-14 and feature presentations from the leadership team and tours of the retail brand family. They are doing everything possible to be recognized as a growing business. They are a Fortune 500 and S&P 500 company.

All of these initiatives are foiling the plans for those traders holding the 37.7% short interest. That represents 39.5 million shares and the average daily volume is 1.69 million. That equates to a very bad week for the shorts if prices were to suddenly spike higher.

Other traders have been selling puts on GME at a record rate. Selling puts on a stock is a bullish strategy with expectations for the stock to go higher. On one day last week, more than 4,000 March $28.50 puts were sold at $1.40 each. Two days later another 4,000 $29.50 puts were sold at $1.38 on average.

There is resistance at $30.85 and I am going to recommend an entry at $31.10 because there may be some new traders waiting to sell at that $31 level. Once the stock moves over that resistance level we could see a flood of short covering.

Position 3/1/16 with a GME trade at $31.10

Long GME shares @ $31.10, see portfolio graphic for stop loss.


Long April $32 call @ $1.40, see portfolio graphic for stop loss.

LGF - Lions Gate Entertainment - Company Description


The afterhours drop of 91 cents on volume of 172 shares on Tuesday was erased before the open and LGF closed at a new four week high.

Original Trade Description: February 17th.

Lions Gate reported earnings on the 5th and dropped like a rock from $26 to $16 on ten times normal volume. Adjusted earnings of 45 cents missed estimates for 47 cents. Revenue of $670 million missed estimates for $767 million.

Lions Gate earnings are always lumpy. As a film maker with 2-3 major motion pictures a year the quarter with a big release always spikes and the quarters without a release crash. In the latest quarter the Hunger Games Mockingjay Part 2 had a huge audience but it was sandwiched between James Bond's Specter and the Martian. Those big films sucked up the available screens and pushed Mockingjay out of the headlines. Even with the competition the film grossed more than $650 million.

The studio has three movies for the first half of 2016 but none are expected to be blockbusters. Lions Gate also has a sizeable portfolio of TV shows like Orange is the New Black, Nashville, The Royals, The Wendy Williams Show and Casual, with more than 75 others across 40 networks. They have contracted future revenue from those shows of $1.3 billion at the end of December. They have a library of more than 16,000 motion picture and television titles.

One of the reasons the stock fell so sharply was the expectations for LGF to acquire a lot of other "free radicals" as John Malone calls them. Those are smaller studios that could help add to the LGF franchise. However, as a Canadian company they are prohibited from acquiring anyone bigger than themselves. When their market cap dropped from $7 billion to $3 billion after earnings it meant their potential acquisition candidates shrunk significantly. They were also rumored to be considering a merger with the Starz Network. That also played into the stock drop mix because owning their own TV network could present problems for selling their content to the other 40 networks they partner with. STRZA shares dropped from $31 to $20 on the earnings because it suggested there would be no merger.

Update 2/24/16: LGF and MGM have taken an equity position in Asian based Fifth Journey, a company founded by former executives from LucasArts, Universal Pictures and Gameloft. The company develops next-generation Hollywood games and interactive entertainment. The partnership and equity stake will allow LGF and MGM to break into the highly lucrative Asian gaming market with an eventual translation into Asian movies.

Now that the smoke has cleared LGF shares are rising again. They closed just under $21 on Wednesday. They are heavily oversold and heavily shorted. The combination in a positive market could continue to push the shares higher.

The lumpy earnings will be forgotten and the stock will recover. It was trading at $41 back in November before the merger news appeared. If that is no longer an option we could see a swift rebound.

I am putting an entry trigger at $21.25, just over the $21.09 high for today. We will only enter the position on a continued move higher.

Position 2/24/16 with a LGF trade at $21.25

Long LGF shares @ $21.25, see portfolio graphic for stop loss.


Long June $23 calls @ $1.50, see portfolio graphic for stop loss.

SGI - Silicon Graphics Intl - Company Profile


No material move ahead of the MS appearance on Wednesday.

The company will present at the Morgan Stanley Technology conference at 1:30 ET on March 3rd. That could provide a headline boost.

Original Trade Description: February 19th

Silicon Graphics is a leader in high performance supercomputing. They build server components that handle compute intensive, fast algorithm workloads, such as Computer Assisted Engineering (CAE), genome assembly and scientific simulations. For instance, the SGI UV-3000 scales from 4 to 256 CPU sockets, utilizing multiple CPU cores per socket and up to 64 terabytes of shared memory. UV-3000 Description That description may be jibberish to readers without a tech background. I started working in computers since 1967 and I can assure you this is thousands of times more powerful than the computers NASA used to send men to the moon and 1,000 times more powerful than your desktop computer today.

SGI surged last week after Hewlett Packard Enterprise (HPE) said they were going to utilize the SGI platform in their new HPE Integrity MC990 X Server. This is a large business server that supports heavy workloads. This strategic partnership with SGI will greatly extend the reach of SGI technology. It is also a confirmation of the stability and high performance of the SGI platform and could lead to additional acceptance by other manufacturers.

In late January, SGI reported adjusted earnings of 14 cents compared to estimates for 5 cents. Revenue of $152 million beat estimates for $145 million. However, shares plunged from $7.80 to $5.20 the next day after the company filed a shelf registration for $75 million in new shares. The company market cap is only $200 million.

Shares remained volatile around $5 until the 12th and the full impact of the Hewlett Packard partnership was understood. They closed at $5.85 on Friday and a four-week high.

I believe the worst is over and the shelf registration forgotten in light of the partnership news.

I am recommending we buy SGI shares with a trade at $6.05 and target $7.35 for an exit. That would be a 21% gain. I am not recommending an option on this position but they do exist. The June $6 call is 95 cents and the $7 call is 60 cents. If you buy the option, I would plan on holding it longer than the stock position and hope that shares move over resistance at $7.40.

Earnings are April 27th.

Position 2/26/16 with SGI trade at $6.05

Long SGI shares @ $6.05, see portfolio graphic for stop loss.

SKX - Skechers - Company Profile


Skechers managed a gain of only a nickel but did rebound from the 50 cent intraday decline. That is definitely positive. The stock closed over resistance but is still caught in the lingering gravity of that level. We need one more big gain to break free.

Original Trade Description: January 21st.

Skechers designs, develops, markets and distributes footwear for men, women and children, as well as performance footwear for men and women under the Skechers GO brand. They currently operate more than 1,340 retail stores.

On Wednesday, the company was named the Brand of the Year for the second consecutive year by the Footwear Industry Awards. They were also named Ladies Brand of the Year.

In the 25,000 runner LA Marathon on February 14th, performance athlete "Meb" finished second in the event wearing the custom Skechers GOmeb Speed 3 shoe. Meb secured his place in the 2016 Olympics with the second place finish. The first place finisher, Weldon Kirui, was also wearing the Skechers GOmeb Speed 3 shoes.

They reported Q4 earnings of 20 cents that matched estimates. Revenue rose +27% to $722.7 million and easily beat estimates for $648 million. The CEO said they saw high single digit sales gains in the domestic business and a 41% increase in the international business. The goal is to grow sales 50% over the next couple of years.

The positive earnings and continued positive headlines lifted shares from the $26 level two weeks ago to $33 today. The $33.25 level is strong resistance. If SKX can close above $33.50 they should be off to the races, pardon the pun.

The next material resistance is near $46.

Position 3/1/16 with a SKX trade at $33.55

Long SKX shares @ $33.55, see portfolio graphic for stop loss.


Long April $35 call @ $1.10, see portfolio graphic for stop loss.

USO - US Oil Fund ETF - ETF Description


WTI rose despite the 10.4 million barrel build in inventories. This is clearly an indication that the trend is changing. The NYMEX reported that long positions in crude futures are at record highs. Every day that passes brings us closer to April and the end of the crude oil inventory build cycle.

This is a long term position so be prepared to see lots of volatility before the final long-term rally begins.

Original Trade Description: January 27th

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.

2/1/16: Position entered with a USO trade at $9.00:

Long USO shares @ $9.00, no stop loss.


Long USO July $10.00 calls @ $.85. No stop loss.

BEARISH Play Updates

BG - Bunge Limited - Company Profile


Big $1.50 gain in the stock today after declaring a 38-cent dividend and news they sold the cargo of rejected wheat to Spain to be used as livestock feed. We will probably be stopped out of the position on Thursday if resistance at $51.50 is broken.

The long put is still open with a stop loss at $51.85.

Original Trade Description: February 18th

Bunge is an agricultural business and food company. They sell food, commodities and fertilizer on a global basis to more than 40 countries. Last week they reported earnings on February 11th and they were not good. Earnings came in at $1.49 compared to estimates for $1.56. Revenue of $11.1 billion missed estimates for $11.6 billion and that was well below the year ago quarter at $13.2 billion.

The company guided lower saying the strong dollar was weighing on revenues and declining economic conditions in countries like Brazil are limiting the available funds to import food. Pricing power is falling as commodity prices continue to decline worldwide.

Adding to Bunge's problems was a cargo of French wheat that was rejected by Egypt because of what they claimed was excessive levels of the ergot fungus. The generally accepted level for fungus is 0.05% and apparently, Egypt decided the content was higher than the standard. Since it is impossible to halt the naturally occurring fungus entirely, it exists in every load. Egypt made the unusual statement that they would have "zero-tolerance" for fungus in the future. If Egypt can get away with that qualification then other countries could try to change their rules as well. Bunge is suing Egypt and the cargo of wheat is still parked off the Egyptian port of Damietta. Egypt subsidizes bread for its population of 88 million.

Reportedly Bunge is trying to resell the wheat but it may be difficult since the rejection has tainted the cargo. The decision by Egypt for zero-tolerance has pressured the prices for wheat to $179 per ton and a five-year low. This hurts future sales by Bunge to any other country.

To recap, Bunge missed on earnings and revenue, guided lower for 2016 and has seen future commodity sales threatened by the Egyptian move and the falling prices of their various commodities.

Shares fell sharply after earnings from $58 to $46. An instant rebound appeared to $53 but that is now fading as the bad news sinks in and the outlook for Bunge's earnings dims even further. I believe that we could see the stock price return to those lows from last week, if not lower. Shares had already been declining since last June.

With a BG trade at $49.75

Stopped 2/22/16: Short BG shares @ $49.75, exit $51.25, -1.50 loss.


Still open:
Long April $47.50 put @ $1.80, see portfolio graphic for stop loss.

VXX - VIX Futures ETF ETF - ETF Description


Another minor drop thanks to the S&P rebound. If we can just get 2-3 more days of market gains, even small gains, as long as there are no triple digit losses in the middle, we could see a return to $20.

The exit target is 19.50 to close the position.

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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