Option Investor

Daily Newsletter, Wednesday, 3/16/2016

Table of Contents

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

Market Wrap

Positive Reaction to FOMC Announcement

by Keene Little

Click here to email Keene Little
The market has been essentially on hold this week until this afternoon's FOMC announcement and reaction was positive. Now the bulls want to prevent the typical reversal the next day.

Today's Market Stats

Following last Friday's strong rally the market consolidated Monday and Tuesday and this morning while waiting to hear what the Fed intends to do this year. The initial reaction to this afternoon's announcement was positive for stocks and especially for precious metals and oil while the U.S. dollar tumbled. The Fed still intends to raise rates this year but Treasury yields chopped up and down and the 30-year finished flat while the 10-year finished 1% lower and the 5-year dropped more than 5%, which steepened the yield curve.

The Fed kept rates the same and said it would raise rates this year less than had originally thought (it's now down to two more instead of four). More importantly, Yellen did a good job walking the tight rope by not sounding too dovish or hawkish. While acknowledging the global economy has slowed more than expected, the Fed believes the slowdown has not negatively affected their expectations for the U.S. economy. Yellen also said inflation has not picked up and the lack of wage growth could continue to pressure inflation expectations. She did say she continues to believe inflation will gradually move back to 2% over time (no definition of "time"). In the meantime though, the Fed cut this year's forecast for core PCE (Personal Consumption Expenditures) from 1.6% to 1.2%.

A reduced expectation for rate hikes caused the U.S. dollar to sell off and that in turn helped spike precious metals and oil to the upside. Whether or not all of these moves will see follow through the rest of the week remains to be seen. Oftentimes the first reaction the Fed is reversed the next day.

If you've felt a little whipsawed by this market this year you can rest assured that your feelings are accurate. Last week Bloomberg had an article that showed how many 1% days we've seen for the S&P 500 this year and it's the highest number since 1938. This is usually not a good sign following a bull market since it's typically associated with topping action (as the bulls and bears battle it out for control). In 1938 the stock market was in a bounce correction off the November 1937 low (1937 was not a good year for the stock market) and the big back and forth swings into early March led to another strong decline (the Dow dropped about -27% into the end of the month before starting a bigger recovery for the rest of the year. The below chart is through March 8th and since then we've had two more days where the index has finished more than 1% from the previous day (this does not include intraday 1% moves). I haven't had time yet to look at volume on each of those 1% days but it would make for an interesting study.

1% days for S&P 500 in 2016

What this year's volatility means for the market obviously can't be known yet but I think it's a warning sign and part of a larger rolling top pattern that we've seen develop over the past three years, which can be seen on the longer-term SPX charts below.
S&P 500, SPX, Monthly chart

Here's something you can pass along to your non-trading family members and friends to help them enjoy bull markets and avoid bear markets. I'm sure many of you have seen, if not bought/tested, trading systems that give you little green and red arrows to show you when to buy and sell (no thinking involved, just do what the arrow tells you to do). So here's a simple trading system for investors who don't want to actively trade their accounts (and it won't cost you $5000 to purchase). Perhaps it's your IRA account or something your parents and/or friends would be interested in since it doesn't require sophisticated chart analysis or knowledge of indicators. The monthly chart below uses two monthly moving averages -- the 8 and 21 (I pick these because they're Fib numbers but 10 and 20 also work well).

When the 8-month MA crosses above the 21-month MA you go long the market and when the 8-MMA crosses below the 21-MMA you get out of the market (and/or get into some inverse funds). As you can see, this system allows you to capture the bulk of the longer-term bull market rallies and avoid the bulk of the bear market declines. We are on a new sell signal as of the cross in February. The 21-MMA is currently at 2027 (the 20-MMA is at 2032) and is currently being back-tested with the rally off the February low. Not shown on the chart is the Bollinger Band and after punching below the bottom of the lower BB in February it's back up to the midline of the band, which is often resistance to be shorted.

The other thing you can see from this monthly chart is how it rallied up to its long-term broken uptrend line from 1990-2002 in 2013 and pushed up along the line, breaking above it several times, into the 2015 high. The pullback from the line leaves a bearish kiss goodbye and the rounded top from 2013 is also a bearish rounding top pattern. The neckline near 1815 is a must-hold level for the bulls on any future pullback.

S&P 500, SPX, Weekly chart

In addition to SPX testing its 20-MMA at 2032 it's also testing its 50-week MA at the same level so from a moving average perspective it's important for the bulls to close the week above 2032 (an intraweek break is not as important). Today's post-FOMC rally hit a high at 2032 (20-MMA) and closed at 2027 (21-MMA). I'm sure those two numbers were pure coincidence today (wink). The week needs to close above 2032 otherwise the bearish setup is for the bounce off the February to lead to a stronger decline than we've seen so far this year.

S&P 500, SPX, Daily chart

Last Friday's rally stopped marginally above its downtrend line from December, currently near its 200-dma at 2018. Monday and Tuesday it consolidated near the downtrend line and now today's rally is a clear break above the line and that's bullish. The next line of resistance is the 78.6% retracement of its December-February decline, at 2041. This has been a very common retracement level for years and it's been very common for it to hold as resistance (or support in a decline). SPX would go positive for the year above 2044. For this reason I think it would be confirmed bullish above 2042-2044 but at the moment it's looking like we could be a lot closer to the end of the rally instead of in the middle of a higher move. What kind of pullback that follows will provide more clues about whether or not we should expect higher but the bearish risk here is for the start of a very strong decline.

Key Levels for SPX:
- bullish above 2042
- bearish below 1969

S&P 500, SPX, 60-min chart

There's a trend line along the highs since February 1st, currently near 2032 (the same 2032 as the 20-month MA and 50-week MA), which stopped the rally on Monday and again today. As can be seen on the 60-min chart below, the bearish divergence at the new highs this month suggest the bulls are running out of energy and considering the trend lines and important moving averages I don't think now is a good time to be betting on the long side. With the potential of a reversal of this afternoon's post-FOMC rally I think the better trade is the short side with a tight stop. It essentially needs to work right away Thursday morning and then assuming we'll start at least a larger pullback we'll then get some clues about whether to expect just a pullback or instead something more bearish.

Dow Industrials, INDU, Daily chart

Like SPX, the Dow made it above its downtrend line from December, currently near 17299, and nearly up to its 78.6% retracement of its December-February decline, at 17388 (with today's high at 17379). If today's rally does not hold it will leave a head-fake break of the downtrend line so bulls need to hold the line on a pullback. If the bulls can keep things going here, the next upside target would be the downtrend line from May-November 2015, near 17670. Not shown on the daily chart below, two equal legs up from February, for an a-b-c bounce correction, is at 17327, which was achieved today.

Key Levels for DOW:
- bullish above 17,390
- bearish below 16,820

Nasdaq-100, NDX, Daily chart

NDX rallied up just shy of resistance today at its 62% retracement of its December-February decline, at 4420, and its 200-dma at 4421. It would obviously be more bullish above 4421, especially if it can close above it for the week. But it's a risky place to bet long with it up against strong resistance.

Key Levels for NDX:
- bullish above 4420
- bearish below 4220

Russell-2000, RUT, Daily chart

Since running into its broken H&S neckline on March 7th the RUT has been struggling to make it higher with the other indexes. It's possible we're seeing a little sideways consolidation following the March 7th high, which will be followed by another rally, but the daily oscillators have crossed back down and as long as it stays below price-level S/R at 1080 it will stay bearish. It would turn much more bearish with a drop below price-level S/R at 1040 but it would be more bullish above 1105.

Key Levels for RUT:
- bullish above 1105
- bearish below 1040

KBW Bank index, BKX, Weekly chart

The weekly chart of the BKX shows the importance of the 66-67 area since it's now strong resistance until proven otherwise. This level was strong support in 2014-2015 until it broke in January and its March 4th high at 66.07 was a back-test of this resistance zone. Bouncing back up to this price-level S/R is a good setup to play a reversal back down following the bearish kiss goodbye against resistance. It would turn more bullish above 67.

Housing Market

Home sales have been mixed but showing some signs of slowing. Today's housing data was mixed with slightly better housing starts than were expected but permits were lower. The chart of both starts and permits shows the steep decline from the peak in 2005 to the 2009 low followed by the slower climb back up and level off this year. Interestingly, the decline is impulsive (5-wave move down) and that's been followed by a correction to the decline that has not yet retraced 50%. An impulsive decline followed by a correction to the decline strongly suggests another leg down will follow.

DJ U.S. Home Construction index, DJUSHB, Weekly chart

Banks have been doing what got them into trouble in the last housing bubble -- lending to unqualified buyers (little to no money down, large mortgages, fog-a-mirror qualification standards, etc.). It's even worse for automobile loans and college student loans, making total risky loans much higher than in 2007, but sticking with the home market, the higher risk-taking by the banks is an indication there's again an effort to find buyers, any buyers, to move inventory and that's a warning sign. The weekly chart of the home builders index below shows the bounce off the February low has the index back up to its broken uptrend line from October 2011 - October 2014, which it broke below in January, and at the same time it's back-testing price-level S/R at 553 (starting from the May 2013 high) with last Friday's high at 550. Not shown on the weekly chart, the 62% retracement of the December-February decline is at 555. Until proven otherwise, this is a good setup for the bears.

Transportation Index, TRAN, Daily chart

The transportation index has made a strong bounce off the January low, up nearly +21% off that low. It was bullish when the TRAN made it back above its August low at 7464 and it has remained inside a narrow up-channel for its rally. It's looking like the index could make it up to its 200-dma, at 7842, if not its downtrend line from March-November 2015, currently near 7940. Importantly, the higher number is also where it would retrace 78.6% of the leg down from November 2015, above which would indicate a greater likelihood that it will make it above its November high. The short-term risk here is that this week's highs are showing bearish divergence against the March 4th high on the oscillators. The bulls need to keep price inside the up-channel whereas the bears need to see a break below the March 10th low at 7426 to confirm the leg up from January finished.

U.S. Dollar contract, DX, Weekly chart

The US$ tanked on the FOMC announcement due to traders believing fewer (if any) rate cuts will weaken the dollar. It's still holding inside an up-channel for its climb off its August 2015 low, the bottom of which was tested this afternoon, near 95.70. A further drop would likely have it dropping down to the bottom of the down-channel that it's been in since its December 2015 high, the bottom of which is near 94. There's not much to tell us which way it will go from here and longer term I think we'll see the dollar remain rudderless for most of 2016.

Gold continuous contract, GC, Weekly chart

The metals and oil spiked higher on the FOMC announcement, which was helped by the dollar's decline. Gold's overnight high last Thursday, at 1287.80, achieved a test of its 38% retracement of its 2001-2011 rally, at 1285.49, and that was followed by a pullback this week. The rally into last week's high was also a small break above the top of a parallel down-channel for the decline since August 2013, which is near 1260, and this week's decline below 1260 left a failed breakout attempt. But this afternoon's rally took it back up to the top of the down-channel and unless it turns right back down from here there is potential for a push higher to test the January 2015 high near 1308. The bearish pattern calls the 3-wave move up from July 2015 low as complete, which suggests another leg down to the bottom of its down-channel, which will be near price-level support near 1000 (S/R from 2008-2009). The bullish interpretation of the pattern is that the rally from the December 2015 low is the 1st wave of what will become a much stronger rally following a pullback correction. We can't know which pattern will play out but at a minimum it's looking like gold is ready for at least a larger pullback, either from here or after another minor new high.

Oil continuous contract, CL, Daily chart

Oil rallied +6.1% today and most of that was before the FOMC announcement. At its March 11th high, at 39.02, oil reached its downtrend line from June-October 2015 (to the tick) and this week it dropped back below price-level S/R at 38, which left it on a sell signal. Today's rally got it back above 38 but it again stalled at its downtrend line, now near 38.70. A rally above 39 could see a rally to 40, where the c-wave of an a-b-c bounce off the January 20th low would be 162% of the a-wave. Oil would turn more bullish above 40. The larger wave pattern would look best with another decline into May/June, potentially down to about 23 before putting in a longer-term bottom. If that happens it would likely turn most traders very bearish on oil at exactly the wrong time but we'll have time to evaluate it if it happens.

Economic reports

Tomorrow's economic reports include unemployment numbers and more importantly the Philly Fed, which is expected to come in at a "less bad" -1.4, an improvement from -2.8 in February. If it comes in below zero it will be the seventh month in a row.

Additional thoughts and conclusion

One of the problems facing the market is where the buying is coming from. Bloomberg published an article last week that highlighted the fact that corporations are doing most of the buying (share buybacks). The divergence between the buying by individuals and funds vs. corporations is historically large, especially in the past two months, and it highlights the importance of corporate buybacks, without which the stock market would very likely be much much lower today.

S&P 500 companies are expected to buy about $165B of their stock in the current quarter whereas there has been a net selling in ETFs and mutual funds of about $40B since January (making it one of the largest quarterly withdrawals ever). The problem is that corporations have borrowed massively (almost $10T since 2008), some of which was used to buy back shares of their own stock (not a productive use of the money).

With corporate earnings in a steady decline they now have two problems -- they can't continue to borrow at the rate they've been borrowing, which means less money for buybacks, and reduced earnings are going to make it more difficult to pay back their loans. Corporations could turn from buyers to sellers of stock in order to free up some needed capital. Not only would they stop supporting the stock market with their buybacks but they'd become net sellers, which could exacerbate the selling by others.

The amount of share buybacks has amounted to about $2T since 2009, which is obviously a lot of support for the stock market. Much of this was made possible with very low borrowing rates, thanks to the Fed's distortions of rates. And the buybacks have only distorted the picture of health for businesses -- they show improved earnings per share even when earnings are in decline. This will all come to an end since it can't be sustained and the impact on the stock market can only be guessed but I don't think it's hard to see it's not going to be good for the bulls.

More corporations have been resorting to "adjusted" earnings instead of using GAAP (Generally Accepted Accounting Practices) to help them report stronger earnings. This was done extensively in the lead up to the 2000 dot.com bubble. Last year 20 or the 30 DJIA companies used adjusted earnings, which were 31% better than GAAP results last year vs. a 12% difference in 2014 so you can see what's happening and the distortions in "real" earnings. Adjusted earnings are used to hide weaknesses in their business and all of this is going to come to a head, probably sooner rather than later.

There's a lot of talk about the relative strength of the U.S. market as a reason why we'll continue to attract money to both the bond and stock markets. While I definitely agree with that belief, what many market participants fail to recognize is the tight linkage in the global financial system and how weak it is. There is a massive global debt burden and a collapse in the bond market of one company, bank or sovereign entity could quickly spread through the system.

Contagion risk is very real and it doesn't take a big company/bank to create the problem. There are derivatives of derivatives and the same counter-party risks we saw in 2007 except larger by order of magnitude. The problems we had back then were not solved and instead were only made worse over the years. The coming correction could also be worse by a large factor. Be careful with your assumptions that everything is fine just because that's what you read in the financial press and hear from central bankers and government officials. It might be harsh to say it but if their mouths are moving, they're lying. And the more they deny something the more you can believe the opposite.

As for the market right here, the bounce off the February low has turned most participants bullish, as I had said it would when the bounce got started. The bearish wave count calls it a 2nd wave correction and I call these the sucker waves for a reason. The 3rd wave (down in this case) is called the recognition wave because it's when the majority of traders recognize they got sucker punched. Don't be one of them.

There is a possible bullish wave count that suggests the rally will continue to new all-time highs and I'm watching the pattern for that possibility. If we see a larger pullback that remains choppy and consolidating then I'll look higher. But at the moment, until I see that kind of bullish pattern, there is risk for the bounce off the February low to turn back down into a very strong decline (stronger than we saw last August and January). It is for this reason that I think it's very important to play defense until we see evidence the bulls have more buying up their sleeve after a pullback.

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

Sometimes There is no Reason

by Jim Brown

Click here to email Jim Brown
Editor's Note

Sometimes stocks go down for no reason. Investors simply lose interest. I believe that is the case with this stock. The earnings numbers are good but the company is not generating any excitement. Voice over IP has lost its fizz and investors are leaving for a new and exciting stock.


No New Bullish Plays


EGHT - 8X8 Inc - Company Profile

8X8 provides voice over internet protocol (VOIP) technology and software as a service (SaaS) communication solutions in the cloud for small and medium businesses and mid-market enterprises. They offer VOIP to in office subscribers, mobile devices, a virtual contact center and virtual meeting across its SaaS platform.

They reported Q4 earnings of 5 cents compared to estimates for 3 cents. Revenue of $53.2 million also meat estimates for $52 million. This is not a widely followed stock and the post earnings bounce was brief.

The stock rallied on an earnings beat in October and spent all of Q4 and early Q1 in the $11 range. Those gains are fading. Shares closed at $9.90 on Wednesday in a positive market. Shares appear poised to give back all those October gains and decline to $8.00.

This is a technical trade rather than something bearish in their business model or results. The company is simply not generating any excitement and investors are selling.

Earnings are May 18th.

Insiders have been net sellers over the last six months and institutions have sold nearly 8 million shares in the last quarter for a 16% drop in fund ownership. I am recommending we short the stock under today's low of $9.87 and target $8.25 for an exit. No options because of distance from a strike.

With a EGHT trade at $9.80

Short EGHT shares, initial stop loss $10.25.

In Play Updates and Reviews

Poised to Rally?

by Jim Brown

Click here to email Jim Brown

Editors Note:

In theory, the dovish comments from the Fed today setup the potential for a continued market rally. As Yogi Berra was famous for saying, "theory rarely works in practice." With the Fed out of the way until the June meeting and Q1 earnings still four weeks away the market should continue higher. Resistance at 2,040 and 2,075 could be a challenge and even in my wildest dreams, I do not expect the S&P to exceed 2,100 in the first half of the year. I hope I am wrong.

The days after a Fed decision can be volatile. Sometimes a direction is formed post meeting and continues the next day. Sometimes the post meeting direction is reversed strongly the next day in a news reversal trade.

Crude prices are going to be a key factor and they rallied to resistance at $38.50 once again on Wednesday. With the freeze meeting now postponed until April 18th anything is possible. Inventories this morning rose less than expected.

Biotechs are also key with the $BTK down again today in a positive market. The Fed may have stepped to the sidelines but investors may not be ready to rush back into the market.

Current Portfolio

Current Position Changes

DWRE - Demandware

Close the call position only.

CMRX - Chimerix

The long recommendation was cancelled.

BBOX - Black Box

The long position remains unopened until BBOX trades at $14.25.

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

AMLP - Alerian MLP ETF - ETF Profile


Up slightly thanks to the rebound in oil prices.

Tuesday 3/8 comments: AMLP declined -6.7% after a court verdict appeared to allow bankrupt Sabine Energy to renegotiate contracts with midstream transporters of natural gas. U.S. Bankruptcy judge Shelly Chapman in Manhattan said Sabine should be able to reject the current transmission contracts with HPIP Gonzales Holdings and Nordheim Eagle Ford Gathering LLC, an affiliate of Cheniere Energy. AMLP was not involved in the case.

Despite the judges comments she also said she did not want to decide an underlying legal dispute in a binding way. The problem is that companies contract with the owner of gathering systems for a field that can consist of tens of thousands of acres with production coming from a dozen different producers. Those producers contract for 10 years or more with the gathering system to ship their gas/oil through the gathering pipeline to a larger pipeline, rail car loading facility, refinery, etc.

For Sabine to reject the contract to ship its gas through the gathering system makes no sense. They have no other way to get it to market. Sabine admitted they were having to flare all their gas because HPIP was not accepting it for nonpayment of the agreed fees. Sabine said they were not paying because HPIP never completed construction of the pipelines. HPIP said Sabine never paid them the agreed construction fee.

The pipeline operators claim that once they contract with a group of producers to construct a system of pipelines to gather production that those contract rights and obligations pass from owner to owner if the leases are sold. Sabine wants to void its portion of the gathering agreement.

All the midstream MLPs were down on the judges comments because it has always been understood that once a pipeline is in place in a field that operator has the right to collect and transport the gas/oil from that field regardless of who owns it.

The judges comments are not law. She called the attorneys to her chamber after the court event and told them to "come to a commercial resolution of your issues" because she did not want to be put in a position of having to rule on the legality of the broader issue that could impact the entire pipeline sector in the USA.

While this does not have any immediate impact on AMLP and an adverse ruling may not impact them for years into the future, the stock was down because the sector recoiled in horror at the possibilities. I suspect calmer heads will prevail in the days to come.

Original Trade Description: March 2nd.

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.

Position 3/3/16:

Long AMLP shares @ $10.40. No stop loss.


Long July $12 call, entry 55 cents. No stop loss.

BBOX - Black Box Corp - Company Profile


BBOX still holding over support at $13. If that level fails, I will cancel the recommendation. No news.

The position remains unopened until BBOX trades at $14.25

Original Trade Description: March 9th.

Black Box is a leading technology solutions provider dedicated to helping customers build, manage, optimize and secure their IT infrastructure. They operate globally with more than 3,500 team members.

Black Box provides data centers, control rooms, contact centers, networking infrastructure while maintaining the highest security protocols and real time monitoring. With 70% of businesses reporting security breaches over the past 12 months it is critical to have somebody that understands the risk to manage your IT assets in all areas. The average security breach costs $3.5 million to repair and recover.

Shares rallied after they reported earnings on January 26th of 37 cents that rose +9% and beat estimates. They reported revenue of $222.5 million. They guided for the current quarter for earnings in a range of 25-30 cents and revenue of $220 million.

The company declared an 11-cent dividend payable April 14th to holders on March 31st. The company also increased the share buyback program by 1 million shares with $7 million to be purchased in March.

BBOX shares are undervalued to their peers by about 50%. The price to book multiple is .68 compared to the peer average of 2.06. They trade at a negative PE of -1.73.

This is a simple play. BBOX rallied from $8 to $13 in the days following earnings. Shares have plateaued at the $13.50 level with a slight upward trajectory. Recent intraday highs over the last two weeks have been from $13.85 to $14.11. When an eventual breakout occurs we could see a spike to $2-$3 as shorts cover and others add to their positions.

I am recommending we buy BBOX shares with a trade at $14.25 and target $16.25 for an exit.

Earnings are May 5th.

With a BBOX trade at $14.25

Buy BBOX shares, initial stop loss $12.85

No options because of wide spreads.

CDW - CDW Corp - Company Profile


Still fighting the moving averages but the short-term trend is still intact. The down trending 100-day is about to join the 150-day with resistance at $41. Any further gains would be a breakout.

Previous: The interesting factoid is that the stock came to rest almost exactly on the 150-day average at $40.90 for the third consecutive day. There must be a high frequency trading program that is focused on CDW because the almost perfect respect for each of the moving averages is too precise for a day trader to manipulate the stock. Volume is 800,000 a day so it has to be a computer program. I looked at the time & sales and the vast majority of the trades, probably 85% or more are even 100 share lots. There are dozens of sequential trades with only a penny difference and sometimes less than a penny. Then dozens of trades a penny higher. That repeated all day long. That suggests a break over the 150-day average will run to the 100-day at $41.32.

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.

CMRX - Chimerix - Company Profile


Support at $5 broke and I am cancelling this recommendation.

Original Trade Description: March 7th

Chimerix is a pharmaceutical company that discovers, develops and commercializes oral antivirals to address unmet needs in the USA. Their drug farthest along in testing was brincidofovir otherwise known as CMX001, which was planned for adult transplant patients to treat adenovirus infection. The drug did no better than a placebo in state 3 trials and they were cancelled.

However, there are other uses for that drug and they have multiple other drugs under development. This recommendation is not based on some super drug in their pipeline.

This is a technical trade based on the probability of either a sharp rebound or an acquisition.

As of today's close CMRX has a market value of about $250 million. At the end of Q4 they had $221 million in cash and $159 million in investments. The company has an estimated shareholder equity of $8.50 per share with no active drugs. With multiple drugs in the pipeline and continued research underway they represent a cheap acquisition for anyone who believes their drugs have promise. Because of their cash and investments that means any active acquisition would have to command a premium over that intrinsic $8.50 value. They do have a poison pill in place to prevent a hostile takeover but they would be open to a friendly acquisition.

They reported earnings on Feb 29th that were a loss of 82 cents compared to estimates for 68 cents. The company also said they were cutting 20% of the workforce (25 workers) in order to be "prudent with their capital."

Earnings are May 9th.

Shares traded to a low of $4.41 post earnings on the 29th and have risen steadily over the last five days with a 5% gain on Monday alone. I am recommending we buy the shares with a trade at $5.75 with our first exit target around $7.60 if no news appears. That would be a 32% gain if we exited there.

I am not recommending any options but the May $7.50 call is 65 cents.

CMRX recommendation cancelled

DRII - Diamond Resorts Intl - Company Profile


Excellent rebound to a two-month high as shorts begin to cover. With 23% short interest it could move fast but the next resistance level is $26.

Original Trade Description: March 10th.

Diamond Resorts is rumored to be planning to take itself private in a leveraged buyout as the result of a previously announced strategic review. Analysts are expecting a deal price in the $32-$35 range. The company has a network of 375 vacation destinations in 35 countries. The firm hired Centerview Partners to evaluate all strategic alternatives after two major shareholders requested the board take action including an outright sale. Marriott Vacations Worldwide and Wyndham Worldwide could be suitors. More than 23% of DRII shares are sold short.

The company recently announced its 10th straight quarter of record financial performance and issued guidance for 2016 calling for another record year. Despite the record performance the share price had declined -25% in 2016. Apparently, this caused two large shareholders to turn up the heat and tell the company to get something done to increase the share price.

Starwood Hotels recently sold its timeshare business to Interval Leisure Group for $1.5 billion or 12 times trailing Ebitda. Diamond Resorts is only trading at 9.5 times with a forward multiple of 6.2 times or significantly undervalued to the Starwood sale. This suggests someone could pay $30 for Diamond and still be accretive to earnings in 2016 without accounting for synergies.

The Diamond CEO is also the founder and he owns 25% of the company. That suggests a LBO might be the most likely option so he can keep his stake.

Earnings May 25th.

With a DRII trade at $24.25

BUY DRII shares, initial stop loss $20.50.

No option recommended because of wide spreads and high prices. However, you could buy the shares and sell a covered call with the May $25 call @ $2.90.

DWRE - Demandware - Company Profile


DWRE posted a decent gain but failed to return to the highs. I am recommending we close the call position. Those April premiums will begin to decay sharply after Friday's March expiration.

CLOSE the Call position only.

Target $43.25 for an exit on the stock position.

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.

HPE - Hewlett Packard Enterprise - Company Profile


Another nice gain on HPE. Initial resistance is $17.25. Shares could accelerate with a move over that level.

Original Trade Description: March 14th.

Hewlett Packard Enterprise was spun off from Hewlett Packard (HPQ) to be the high growth segment of the company. The remaining HPQ was the slower growing PC and printer company.

HPE reported adjusted Q4 earnings of 41 cents compared to estimates for 40 cents. Revenue of $12.72 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.68 billion.

CEO Meg Whitman said, "We saw the progress that comes from being more focused and nimble. We delivered a third-consecutive quarter of year-over-year constant currency revenue growth, and excluding the impact of recent M&A activity, we saw revenue growth in constant currency across every business segment for the first time since 2010."

For the current quarter HPE guided to earnings of 39-43 cents. For the full year they expect $1.85-$1.95 and that was more than analysts expected at $1.87.

Earnings are boring. The really good news came from the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. Last year they returned $1.3 billion to shareholders in the form of dividends and share buybacks. In 2016 HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.

In May they expect to close their previously announced deal with China's Tsinghua and that will provide an additional $2 billion in cash that HPE said it would use to repurchase shares.

This means over the next couple of months we should see significant share activity as fund position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016.

Earnings June 2nd.

HPE shares have shaken off their post spinoff weakness and are now trading at a four-month high. I am recommending we buy this stock in anticipation of investors moving in ahead of future dividends and buybacks. I am not recommending an option because they are too expensive.

Position 3/15/16:

Long HPE shares @ $16.36, see portfolio graphic for stop loss.

SGI - Silicon Graphics Intl - Company Profile


Weak rebound. I considered closing the position but raised the stop loss to $6.30 instead. We have waited for three weeks on a move and I hate to bail if the market is about to move higher. No news.

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.

WIN - Windstream Holdings - Company Profile


WIN dipped again intraday to $7.12 and only 2 cents above our stop loss before rebounding to close at $7.59. Maintain that $7.10 stop and hopefully the decline is over.

Original Trade Description: March 11th

Windstream provided network communications and technology solutions for consumers, businesses and enterprise organizations. They provide high-speed internet access, hosted web services and cable TV to a combined total of 1.6 million residential and business customers. They have more than 125,000 miles of high-speed fiber optic cable with speeds up to 500 gbps along their main corridors. They have 11 major data centers providing web hosting, cloud services, etc.

In the Q4 earnings, WIN reported adjusted earnings of $1.41 that crushed estimates for a loss of 48 cents. Revenue of $1.427 billion missed estimates slightly for $1.433 billion. The major earnings beat came from a spinoff of some of its telecom assets into a REIT. The cash received from the spinoff will allow some major network improvements in the months ahead.

The company declared a 15-cent quarterly dividend payable April 15th to holders on March 31st. That equates to a 7.3% annual yield.

WIN shares have been moving higher since they reported earnings on February 25th. Shares are at resistance at $8.25 and could breakout this week. The next resistance would be $11.85.

While we are not playing the stock for a takeover there is always the chance that somebody like Verizon or even Google could decide the $750 million market cap was chump change for 125,000 miles of high-speed fiber, cable TV and data center business.

I am going way out on the option to August because it is cheap and it will make a good lottery play even if we close the stock position early.

Buy WIN shares, currently $8.22, initial stop loss $7.10


Buy August $9.00 call, currently .40 cents. NO STOP LOSS

BEARISH Play Updates

VXX - VIX Futures ETF ETF - ETF Description


Another nice decline despite the choppy market. If we can get another rally day on Thursday we could hit our exit target.

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
02/27/16 adjust exit target to $19.50
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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