Option Investor

Daily Newsletter, Wednesday, 4/13/2016

Table of Contents

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

Market Wrap

Another Opex Rally

by Keene Little

Click here to email Keene Little
The typically bullish week for opex got a slow start this time but Tuesday's and Wednesday's rallies have pushed many of the indexes to new highs for the rally from February. There's still some upside potential but there are some reasons for caution about the long side.

Today's Market Stats

The stronger sectors today were the risk-on ones, such as the biotechs, while risk-off (defensive) sectors were down, such utilities and consumer staples. The financials were also strong, helped by JPMorgan's earnings report before the bell this morning. The RUT was also up strong, +2.2% for the day, and risk-on appears to be the trade du jour this week. As I'll get into later, we have some strong bullish indications for this market but we also have reasons to be cautious dead ahead. Stock indexes could soon struggle with significant lines of resistance but if they're pushed aside in the coming days we'll have all the evidence we need to get long and enjoy the ride.

Banks were up strong today (BKX +2.5%), which helped both the Dow and SPX. JPM was up +4.2% after announcing earnings in the pre-market session. Earnings and profits were down from a year ago but better than lowered expectations (it's all in how you manage expectations). Interestingly, JPM did not offer guidance for Q2. The result was shorts got scared out of their positions and helped the stock GS was not far behind, up +3.6% and after the banks were held down more than the broader indexes it's obvious that short covering helped lift the banking index back up, although BKX is still down considerably compared to the broader averages.

Helping the stock market today were the economic numbers, which included the PPI numbers. They came in lower than expected and were negative, meaning "disinflation." Retail sales were also negative for March and the combination keeps the Fed from being able to raise rates, which of course the market likes.

I did a lot of chart reviews tonight before starting to write so I got a little behind. Therefore I'm just going to jump right into the review of the charts.

I'll start tonight's chart review with the RUT because I see an interesting setup that should tell us whether or not we want to get more bullish or instead start looking for a reversal back down. It's looking like the RUT is either going to break out in a strong bull run or break down in a strong bear decline. I lean short here but above 1135 would have me backing off and above 1150 would have me much more bullish.

Russell-2000, RUT, Weekly chart

The RUT's weekly chart shows it has made it up to its downtrend line from June-December 2015, currently at 1131-1136 (depending on whether the chart is with the arithmetic or log price scale, resp.). As can be seen on the daily chart further below, the 200-dma is currently near 1133 but the 50-week MA is nearing 1152. There's a strong reason why the 1131-1136 area is going to be tough resistance, at least on the first attempt to break through, but above that range I would expect a run up to 1150. Above 1150 would be much more bullish but at the moment we need to watch carefully for possible trouble for the bulls. The RUT is one of our canaries in the coal mine so following this week's opex rally we'll get a clearer picture for what's next.

Russell-2000, RUT, Daily chart

The RUT's daily chart below shows how closely aligned the 200-dma is to the downtrend line from June-December 2015. Kudos to the bulls if they can break through both of those on the first attempt, especially since it's showing waning momentum. If price consolidates sideways while MACD "resets" with a pullback to (but stays above) the zero line we'd have a bullish setup. But the RUT has been chopping its way higher in what looks like a bearish rising wedge pattern since the March 7th high with bearish divergence supporting the bearish interpretation of this pattern. This in combination with price reaching potentially very strong resistance is what has me leaning bearish into resistance until (if) we see a strong break through resistance with a rally above 1136.

Key Levels for RUT:
- bullish above 1136
- bearish below 1088

Russell-2000, RUT, 60-min chart

Getting in closer to recent price action, the RUT's 60-min chart below shows the rising wedge pattern, the top of which was reached today with the close near 1129. A small pullback and then minor new high would do a nice job completing the pattern, potentially near 1132 where the downtrend line from June-December 2015 crosses the top of the rising wedge Friday morning. That would be a low-risk setup to try to short a reversal back down and use a stop no higher than just above 1136 (end-of-day stop instead of intraday is preferred since we see a lot of intraday stop runs, but obviously that increases your risk so trade size is important).

S&P 500 vs. NYSE stocks above 200-dma, chart courtesy Mark Ungewitter

Before I get into the SPX charts, which has it looking like SPX could top out below 2100, I want to show a reason to stay bullish. AT the bottom of the chart it shows the percentage of NYSE stocks above their 200-dmas vs. the SPX above. The idea here is to monitor when the percentage of stocks above their 200-dmas drops below 20%, indicating deeply oversold. The buy trigger occurs when the percentage of stocks above their 200-dma rises above 50%. This trading model, shown to me by a fellow trader, Mark Ungewitter, shows the buy signals with the little red dots on the SPX line and we just got another buy signal following the January-February drop below 20%. As noted on the chart, this has worked 7 out of 8 times in the past 30 years (the one failure was December 2001). Those are tough odds for a bear to fight against. Market breadth, using the cumulative advance-decline line has broken out to new highs before price and that's another reason for bears to be cautious -- there could be stronger buying than what appears by other technical indicators, such as waning momentum.

Gann Square of 9 chart

Countering the chart above, or at least a reason for caution about the upside, is an obscure tool called the Gann Square of Nine (Sof9) chart, something I haven't shown in a long time. A portion of the chart is shown below and for those who are not familiar with this, it's essentially a Fib spiral of numbers (that I built in Excel and therefore looks square-ish). It starts with '1' in the center and then the first "ring" around the center starts with '2' at the 9:00 position and spirals clockwise from there, finishing with '9' below '2' and then continues spiraling from there, hence the name Square of Nine. It's uncanny how levels (and time, which I won't discuss much at this time) relate to each other on this chart and highlighted on the chart are some examples and why we're approaching a potentially important level for SPX -- 2088-2089.

I squished the chart as much as I could and yet keep it readable so I apologize for the small numbers. Highlighted are some important lows -- on the red vector there's 768 (October 2002 low) and on the blue vector there's 666-667 (March 2009 low). The vectors through those two levels help identify important levels that "vibrate" off each other and on the red vector you can see 1422 (April 2012 high), 1576 (October 2007 high) and now 2088-2089 are related to each other. On the blue vector, through 666-667, the next important level above us is 2098-2099. As you'll see on my SPX charts below, the area between 2083 and 2100 is important and the Gann Square of Nine chart is one more reason why the current rally could finish at any time. But above 2100, as I'll point out on the charts, it would be much more bullish. I think it's particularly important to note that the October high at 1576 was 6 spirals around from the October 2002 low at 768. Each 360-degree move is important and 6 levels is particularly important. Half that is 3 spirals and that's the distance between the October 2007 high and 2088-2089.

Without getting too much into time relationships with this chart, I will add that today is "square," as in 90 degrees, to 2084-2085 and today's high was 2083 and therefore we're at a potentially important price/time point on the chart. Lastly, 2088 is square to 2134, which was the May 2015 high. All of this doesn't mean we're topping here or will top out near 2088-2089 (or 2098-2099) but these Gann relationships should be paid attention to until they're proven OBE (overcome by events).

S&P 500, SPX, Daily chart

The short-term pattern for SPX would look best with a small pullback/consolidation on Thursday and then another minor new high to complete a 5-wave move up from April 7th, which in turn would do a nice job completing the 5th wave of the leg up from February. The pattern for the rally from February is a bit sloppy so it's hard to hang my hat on a wave count but today's high, and then presumably higher into Friday, looks like it will leave a bearish divergence against the April 1st high, which is fitting for a 5th wave. There's a price projection for a corrective pattern (instead of an impulsive 5-wave move up from February) near 2092 and that overlaps the downtrend line from July-November 2015, which makes it a level of interest to watch carefully for a possible top to this move. But a rally that gets above 2100, and stays above (not just an intraday break), would be a stronger bullish statement and it would point to at least a test of the November high at 2116 and potentially the May 2015 high at 2134. This is where the daily chart and the Gann Sof9 chart above are in agreement.

Key Levels for SPX:
- bullish above 2100
- bearish below 2022

S&P 500, SPX, 30-min chart

A short-term perspective is shown with the 30-min chart below to point how it will ideally play out the rest of this week. I say ideally because I'd like to see a 5-wave move up from April 7th to give us a good ending pattern. A pullback/consolidation on Thursday would "reset" the overbought oscillators and then a new high, presumably up to the downtrend line from July-November 2015, near 2092 by next Monday, would likely leave a bearish divergence. But with price projections, including the 127% extension of the previous decline (April 1-7), coinciding at 2083-2087, as well as the Gann Sof9 2088-2089, it warrants caution by bulls here -- we could see a top form at any time (not a reason to short it here without appropriate risk management, but certainly a good time for bulls to be more cautious).

Dow Industrials, INDU, Daily chart

The Dow struggled with its downtrend line from May-November 2015 since first testing it on March 22nd and oscillated around it for nearly two weeks after climbing above it on March 30th. Today's rally gave it a clean break above the line and now the next level of resistance it will have to deal with is its November 2015 high at 17977. It remains inside a bullish up-channel for its rally from February but note how it used the midline of the channel for support following the initial rally off the February low. It broke below the midline while it struggled with its May-November downtrend line and now appears to be heading back up to the midline, which often acts as resistance in this scenario. By the end of the day Friday the midline will be near 18110 and for this reason I have a key level to the upside at 18150, above which would be more bullish and it would be a reason to look for at least a test of its May 2015 high, at 18351.

Key Levels for DOW:
- bullish above 18,150
- bearish below 17,484

Nasdaq-100, NDX, Daily chart

NDX is now within a few points of retracing 78.6% of its December 2015 - February 2016 decline, near 4557. This has been a common retracement in this market and oftentimes the end of a bounce correction. The minor new high above its April 1st and 6th highs is showing bearish divergence, which is not a rally killer but a reason for caution. It fits as the completion of the rally leg from February but I see at least a little more upside potential to test price-level S/R near 4600 and maybe up to the top of arising wedge, near 4625 by Friday, above which would be more bullish.

Key Levels for NDX:
- bullish above 4625
- bearish below 4435

10-year Yield, TNX, Daily chart

Treasury prices pulled back from their highs on April 7th and that gave yields a little bounce. But looking at TNX, it bounced in a 3-wave pattern, with two equal legs, up to its broken uptrend line from July 2012 - January 2015, near 1.79. Today's reversal back down from a small gap up fits as the start of the next leg down and a drop to price-level support at 1.65 could be next. That would give us a 5-wave move down from March 16th and set up a little larger bounce correction but it would keep the downtrend intact. Buying in Treasuries would put downward pressure on stocks so keep an eye on the bonds to see if this plays out.

KBW Bank index, BKX, Weekly chart

On March 21st BKX made it up to price-level resistance near 66.50 and then pulled back into the April 7th low. You can see on the weekly chart how important that support level was since breaking above it in November 2013. It's not surprising to see it act as resistance now and today's high at 66.57 is another test. On both the daily and weekly charts the oscillators certainly have room to run and a break above 66.50 that holds above that level would keep it bullish. Look for a run up to the 50-week MA, nearing 71, if the rally continues. The 200-dma is coming down towards 70 so 70-71 is an upside target. But if the banks are simply enjoying a bit of short covering it could flame out at any time. The relative weakness of the banks, as compared to the broader market, is reason for concern if you're feeling bullish about the market.

U.S. Dollar contract, DX, Daily chart

The US$'s strong bounce off support near 93.80 yesterday looks good for a reversal of its decline. I'm not looking for anything more than a return to the top of its trading range, near 100, and then back down to the bottom of the 94-100 trading range by the fall before it will be ready for the next leg of its longer-term rally off its April 2008 low. If it does drop a little lower it would not turn more bearish until it gets below 92.50.

Gold continuous contract, GC, Weekly chart

Gold has bounced back up to the top of its parallel down-channel that it's been in since 2013, currently near 1250. If it can hold above that level, which it was unable to do after poking back above it on Monday, we should see it reach for its January 2015 high near 1308. A rally up to that level would likely be followed by a deeper pullback correction but I think it would be bullish. As of right now I think we could see gold head back down to the bottom of its channel, which will be near 1000 in August. If the dollar is getting ready to rally it could put pressure on gold and other commodities.

Oil continuous contract, CL, Weekly chart

Oil is once again challenging the top of its down-channel that it's been in since the January 2015 low, currently near 41.40. A little higher, at 43.88, is its 50-week MA and that's an upside target if the buyers keep at it. It's looking like a rally into an expected announcement next week by Russia and Saudi Arabia that they plan to freeze production. That will probably happen when hell freezes over and this rally could come to a fast conclusion if the rally is based on the rumor (buy the rumor, sell the news).

Economic reports

Tomorrow's economic reports include the CPI numbers and unemployment claims. Friday will be more economic numbers and the Michigan Sentiment reading. No big changes are expected


When I look at the charts, using typical technical indicators such as trend lines/channels, oscillators and even EW counts, I'm seeing the market vulnerable to topping at any time. If it holds up through this week I wonder if the bears will exact some revenge next week. But as mentioned above with the percentage of stocks above their 200-dma and the strong cumulative advance-decline line, it's hard to be bearish. I think the bottom line is that bulls should be very cautious about the potential for at least a deeper pullback (and possibly something more bearish).

In the meantime, bears don't have anything yet to support a reason to get short here (no reversals). We have some potentially strong resistance levels that offer a reason to try shorting with relatively low risk but preferably after making it a little higher and maybe by Friday. That of course would subject bears to a rally on Monday after a Sunday night rally in the futures so risk management is very important. Have well-defined stop levels and honor them (on a closing basis since intraday stop runs are common). More conservative traders can simply follow the trend and keep trailing your stops higher. Once support levels are broken look for bounces to short and then trail stops lower to prevent a big spike back up putting you underwater.

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

Drug Pipeline

by Jim Brown

Click here to email Jim Brown
Editor's Note

That title conjures up images of a bunch of drug mules with big backpacks of illegal drugs sneaking across the border under cover of darkness. However, in this context it is a large pipeline of new and novel drugs on their way through the testing stage before becoming the next big drug to fight cancer.


HALO - Halozyme Therapeutics - Company Profile

HALO is a biotechnology company that researches, develops and commercializes human enzymes. Its human enzymes are used to facilitate the delivery of injected drugs and fluids, enhancing the efficacy and the convenience of other drugs or can be used to alter tissue structures for clinical benefit. The company is also developing PEGylated recombinant human hyaluronidase (PEGPH20) for the treatment of metastatic pancreatic cancer, non-small cell lung cancer, gastric cancer, metastatic breast cancer, and other cancers in combination with various cancer therapies.

This is an easy play. The company is presenting data from multiple trials at the American Association of Cancer Research meeting that will take place April 17-20th. They will release five different abstracts detailing drug interactions at this conference. At the same time they will host an investor/analyst meeting on April 18th at 4:PM.

They reported earnings of 3 cents compares to expectations for a loss of 11 cents. Revenue was $52.2 million.

HALO has partnerships with Roche, Baxalta, Pfizer, Janssen, AbbVie and Lilly. This is not a pipsqueak company.

HALO broke over recent resistance at $11.25 on Wednesday and could run if the data presented is positive. I am recommending we take a long position with a tight stop at $10.50.

Buy HALO shares, initial stop loss $10.50.

No options recommended.


No New Bearish Plays

In Play Updates and Reviews

Now What?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow vaulted to the top of the primary resistance range and the S&P just moved slightly into the resistance minefield. Where do we go from here? This was the second major short squeeze in two days and this one was caused by a monster rally in Asia on some better than expected economic news from China. We do not know if that Asian rally will continue and whether it will influence our markets for another day.

JP Morgan added to the bullish sentiment when they beat lowered earnings estimates and had positive things to say about the banking business.

The Dow and S&P are up about 2% over the last two days and the S&P ventured over the beginning of strong resistance at 2,075 to close at 2,082. A big short squeeze can do wonders for breaking resistance with the Dow closing at 17,908 and only 17 points from breaking above that current resistance band.

The stocks beaten down the most, rallied the most, which is common with short squeezes. However, the big blue chip stocks led the indexes higher.

Thursday and Friday will be critical days for market direction. If the indexes continue higher on Thursday it could cause even more short covering and moving closer to the old market highs makes them a target that is very hard to ignore.

Most long-term rallies start with short squeezes but not all short squeezes turn into long-term rallies.

I apologize for the extra newsletters on Tuesday evening. There was an error in the content process and the Option Investor play updates were listed in the Premier Investor newsletter. When that was corrected, the newsletters were resent.

Current Portfolio

Current Position Changes

ORBC - Orbcomm

The long position remains unopened until ORBC trades at $10.50.

LGF - Lions Gate Entertainment

The short position remains unopened until LGF trades at $19.65.

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

CLDX - Celldex Therapeutics - Company Profile


No specific news. Disturbing dip right at the close to end the day flat.

Original Trade Description: April 5th.

Celldex Therapeutics is a biopharmaceutical company that develops, manufactures, and commercializes novel therapeutics for human health care in the United States.

That could be the opening sentence for almost any biotech company in the USA. They have multiple cancer drugs in trials and they have a drug for breast cancer in a registration trials after already passing through the gauntlet of multiple clinical trials.

Earnings are May 4th.

The stock was starting to recover from a long-term decline until a brain cancer drug failed a clinical trial and shares collapsed from $8 to $3. Now after a month of consolidation shares are starting to move higher again.

In biotech stocks with bad news, traders tend to over sell the news. The stock crashes to some ridiculous low and then languishes there for a while until all the existing owners get fed up due to the lack of a bounce and leave. New investors seeing a bargain and the opportunity to get in at a ridiculous low begin to accumulate the stock. I believe that is what we are seeing now.

This is really a play on the potential for a rebound in the biotech sector rather than some outstanding CLDX quality. I believe the stock is oversold and it has been rising for the last four days along with the biotech sector. If the sector continues to rise as I expect we should see CLDX rise as well as the penny stock investors begin to load up on an oversold opportunity.

Shares hit $4.65 today before fading with the market. I am recommending we buy a trade at $4.75 with a stop at $3.25. I will raise that stop rapidly if the trade begins to stall.

Position 4/6/16 with a CLDX trade at $4.75

Long CLDX shares @ $4.75, see portfolio graphic for stop loss.


Long May $5 call @ 50 cents. No stop loss.

DDD - 3-D Systems Corp - Company Profile


No specific news. Three cent decline from Tuesday's nin-month high.

Original Trade Description: March 29th.

3D Systems provides 3D printing products and services worldwide. The printers use input from 3D design software, CAD software and other design tools using a range of print materials including plastic, metal, nylon, rubber, wax and composite materials.

3D crashed and burned after a couple of horrific earnings reports in 2015 and shares declined from $33 to $7 at the January lows. The entire sector saw a reset of stock prices and expectations.

For Q4 3D posted earnings of 16 cents that blew away estimates for 3 cents. 3D is the industry leader and appears to be roaring out of the darkness that enveloped the sector in 2015. Three-dimensional printing revenues are expected to grow from $3.07 billion annually in 2013 to $12.8 billion in 2018 and $21 billion by 2020 with a consolidated average growth rate of 34%.

On Monday 3D Systems announced several new software products that overcome prior limitations weighing on all printer companies. The product suite called Geomagic Freeform has multiple products that will power a jump forward in the 3D technology capability and greatly reduce the time needed to go from concept to printed article.

Under Armour (UA) just announced it used 3D Systems selective laser-sintering technology to produce the UA Architech shoe. This is the world's first performance training shoe with a 3D-printed midsole that is available to the general consumer market. Under Armour plans to release an entire line of 3D printed shoes in 2016. Late last year New Balance also partnered with 3D to make a commercially available running shoe with a 3D-printed midsole.

DDD shares are rallying on the multiple announcements and the appearance that all is well in 3D land. Resistance is $15.45.

Earnings are May 5th.

Position 3/30/16 with a DDD trade at $15.60

Long DDD shares @ $15.60, See portfolio graphic for stop loss.

Long May $17 call @ $1.05, See portfolio graphic for stop loss.

ORBC - Orbcomm Inc - Company Profile


No specific news. I raised the potential stop loss to $9.75 and just under Tuesday's low. That will reduce our future risk.

The position remains unopened until ORBC trades at $10.50.

Original Trade Description: April 5th.

Orbcomm provides machine-to-machine (M2M) and internet of things (IoT) solutions in the U.S., South America, Japan, Europe and internationally. Customers are able to track and manage fixed and mobile assets. They also provide satellite automatic identification service (AIS) for vessel navigation. Orbcomm has its own constellation of 41 low earth orbit satellites. Communication can also be handled through terrestrial based cellular network services.

Basically, Orbcomm can track anything and communicate with anything that is Internet, Cellular or GPS enabled. Companies use Orbcomm devices to track refrigerated trucks and trailers while monitoring temperatures of those vehicles. Orbcomm can track and monitor engine performance, locations, operating time, etc on over the road trucks, earth moving equipment, trailers on trains, containers on ships, etc.

Orbcomm added 239,000 connected devices in Q4 alone. Total installed and billable communicators rose from 976,000 at the end of 2014 to 1,569,000 at the end of 2015. On December 21st Orbcomm successfully launched 11 second generation OG2 satellites from Cape Canaveral and after testing all satellites went live on March 1st.

Large fleet customers are signing up for the Orbcomm service faster than the devices can be installed. Growth is accelerating faster than the 61% increase in 2015. Current high profile customers include Caterpillar, Hitachi Construction, John Deere, Komatsu, Volvo, C&S Wholesale, Canadian National Railway, Hub Group, KLM Transport, Marten Transport, Swift Transportation, Target, Tropicana, Tyson Foods, Walmart, Union Pacific Railroad, Werner Enterprises and hundreds more.

Earnings last quarter were only a penny because of the high cost of satellite launches. They also acquired three companies, Skywave, InSync and WAM Technologies.

Earnings are May 5th.

Shares of ORBC have been erratic over the last four months. As they announce successful satellite launches, new Fortune 100 customers, etc the stock spikes and then goes dormant for a week or two until the next announcement. Most traders have never heard of the company so every press release introduces ORBC to a new segment of investors. I know the stock looks over extended but I believe they are in a growth phase that will continue.

I am recommending we buy ORBC on a breakout over $10.50 with a stop loss at $8.75. One analyst last week was talking about $25 now that the satellite expansion phase was complete and the M2M and IoT applications were becoming a reality.

With ORBC trade at $10.50

Buy ORBC shares, initial stop loss $8.75

No options because of wide spreads.

SPXC - SPX Corporation - Company Profile


Another new 7 month high. No specific news. Only about 25 cents below our exit.

Target $16.65 for an exit.

Original Trade Description: March 30th

SPX provides specialized heating, ventilation and air conditioning (HVAC) solutions worldwide. They also provide instrumentation, detection and measurement for industrial markets. They offer detection and inspection equipment for underground pipes and cables, specialty lighting products, communications technologies and bus fare collection systems. Their power segment provides all types of equipment and technology for the power generation, transmission and distribution market.

As part of a companywide restructuring process in December they agreed to sell their dry-cooling tower business. On the Q4 conference call they also announced plans to sell portions of the power division. They hired an outside advisor to provide strategic alternatives as they sell off the low margin and poorly performing portions of the business. They spun off the flow food and power portion into a new company SPX Flow (FLOW) in September.

They reported earnings of 52 cents that missed estimates of 57 cents. However, shares rebounded on the news of the various restructuring efforts. Shares rallied to resistance at $14.85 at the close today. A break over that resistance could hit $17 in the days ahead.

Earnings are May 26th.

Position 3/31/16 with a trade at $15.05

Long SPXC shares @15.05, see portfolio graphic for stop loss.

No options because of wide spreads.

TRN - Trinity Industries - Company Profile


Nice continued rebound from that support at $18. We will not be exiting before earnings. We have a long way to go to get back over $20 but we have a July call option so plenty of time.

Original Trade Description: March 18th

Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.

Shares crashed in mid February after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.

They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.

The key here is that Trinity is now trading at a PE of 3. Yes 3.74 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.

Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.

They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.

This stock was extremely oversold but began recovering in early March. Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.

At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.

Earnings April 21st.

Position 3/21/16:

Long July $20 call @ $1.50, no stop loss.

Previously Closed 4/5/16: Long TRN shares @ $19.15, exit $17.50, -1.65 loss.

WIN - Windstream Holdings - Company Profile


No specific news. Closing in on the last resistance at $8.25. I am recommending we double down on the August $9 call, currently 13 cents. If we do get a breakout that lowers our cost and increases our profits.

Double up on the Aug $9 call, currently 13 cents

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.

Position 3/11/16

Long August $9.00 call @ .40 cents. NO STOP LOSS

Previously closed 3/29/16: Long WIN shares @ $8.22, exit $7.10, -1.12 loss.

BEARISH Play Updates

LGF - Lions Gate Entertainment - Company Profile


LGF rebounded slightly from the $20 level in a short squeeze market. We are still not in this position so we can watch for free.

This position remains unopened until LGF trades at $19.65.

Original Trade Description: April 12th.

Lions Gate Entertainment engages in motion picture production and distribution, television programming and syndication, home entertainment, digital distribution and sales activities. They produced the series Twilight, Hunger Games and Divergent along with dozens of other films.

Shares have been falling since the Hunger Games and Divergent movies have run their course. The last Divergent movie, "Allegiant" only produced $137 million in worldwide ticket sales and was considered a disappointment.

The company has other films in progress but none are expected to be the box office draws like the ones mentioned above. There was a report last week that Lions Gate may be looking to partner with another studio and may be looking at buying a minority interest in Paramount. That would be a good deal for Lions Gate since Paramount owns Transformers, Mission Impossible and Star Trek. However at the 25-35% stake being discussed that would be roughly $2 billion and a big bite for Lions Gate at a time when future cash flows may be shrinking.

Lions Gate has not been one to shy away from acquisitions. They have done several in the past and that is how they got the Hunger Games and Twilight franchises when they purchased Summit Entertainment. They even tried to buy MGM in 2010 but failed.

Knowing that Lions Gate is on the prowl for an acquisition and has no major movies in the pipeline has put the stock into a slide.

Earnings are May 10th.

I am recommending we short LGF with a trade at $19.65 and look for them to set a new low on any acquisition announcement. Normally the acquirer shares go down. Even if they do not make an acquisition we know they are looking so investors are getting out of the way now.

With a LGF trade at $19.65

Short LGF shares, initial stop loss $20.65


Buy May $19 put, currently 80 cents, stop loss $20.65.

VXX - VIX Futures ETF - ETF Profile


The second big short squeeze in a row caused the volatility to collapse even more. If the rally continues we will probably be stopped out on Thursday.

Original Trade Description: April 9th.

The VXX ETF tracks one-month futures contracts on the Volatility Index of $VIX. The VXX is actually less volatile than the VIX but travels in the same direction. The VXX is highly liquid with average volume of roughly 75 million shares.

The VXX or any volatility ETP or leveraged ETF should not be held for long periods of time because the futures roll over every month will reduce the value of the position. However, it is suitable for short-term tactical trades. We closed a short on the VXX a couple weeks ago for a decent profit.

With the potential for another bout of market volatility I am recommending we go long the VXX this time. Long the VXX is the equivalent of a short position since it rises with a decline in the market.

The VXX touched 17 last Monday and that was a seven-month low. I think the odds of the VXX returning to 21-22 are excellent and returning to 25 reasonably good. Going long the VXX will be a hedge against out long stock positions.

Position 4/11/16

Long VXX shares @ $18.15. Initial stop loss $16.75.

No options because of high premiums.

XLF - Financial ETF - ETF Profile


Big move after JPM reported earnings this morning and had positive things to say about the banking business. Bank of America and Wells Fargo both report on Thursday.

Original Trade Description: April 11th.

The XLF is commonly referred to as the banking ETF. However, it is actually a Financial Sector ETF. Banks account for 33% of the holdings with WFC, JPM, BAC, C, USB and GS six of the top ten holdings. Insurance, brokers, diversified financial services and REITs make up the rest of the ETF.

We are playing it to capitalize on the movements in those six top banks as they report earnings. The ETF normally moves slow and I would not recommend it as a stock holding ahead of those earnings simply because we do not know which way it will move.

I am recommending a short-term option strategy called a strangle using very inexpensive options. We only care about catching the post earnings move in what could be a rocky quarter. Since estimates are already very low there is the potential for an upside surprise and that could cause some short squeezes with the banks.

I looked at playing the weekly puts but the premiums were in some cases higher than the May premiums so we will buy the time even though we will not use it.

Position 4/12/16

Long May $23 call, @ 19 cents, no stop loss.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.

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