Option Investor

Daily Newsletter, Wednesday, 4/27/2016

Table of Contents

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

Market Wrap

Market On Hold for Fed Followed By Small Rally

by Keene Little

Click here to email Keene Little
Following the small decline off last week's high the market had essentially gone on hold (except the RUT, which kept rallying) while waiting for today's FOMC announcement. No significant changes from the Fed resulted in a muted reaction from the market.

Today's Market Stats

The stock market indexes were able to bounce marginally off Monday's lows (the RUT more strongly so and to new highs above last week's) but the choppy price action looks more like a bounce correction than something more bullish. This afternoon's post-FOMC reaction, while slightly bullish, still leaves us guessing what the next big move will likely be.

The pending home sales report for March, released shortly after this morning's open, was better than expected (+1.4% vs. +0.3%) but a significant drop from the +3.4% in February. Other than the crude oil inventories (increased 1.99M) it was a quiet morning for economic reports and the market wasn't focused on any of the reports anyway. For the past several days it's been more concerned about the hints from the Fed about future rate hikes. No one expected them to raise rates today, and they didn't, but the language about future rate hikes is still important to the market.

There was a slightly positive reaction to the 14:00 announcement but nothing to write home about. It was the usual pop higher (following the initial spike down) to shove the shorts out of the market and keep the Fed from being embarrassed by the market but not much more than that. Tomorrow could be more telling as far as providing the clues needed to help us determine the next bigger move.

The Fed stated "Economic activity appears to have slowed" and "Growth in household spending has moderated" and did not give any indication when the next rate increase might happen. The dovish comments helped pop the market up in the afternoon because after all, everyone knows a more accommodative Fed is much more important than slowing corporate revenue and earnings, a slowing economy and slowing consumer spending. I mean it must be true since the market did not sell off (yet) on the not-encouraging economic news from the Fed.

Missing from this month's statement is their assessment of a "balance of risks," which they've consistently stated when measuring risks to the economy vs. expected growth. And once again it's that "transitory effects of declines in energy and import prices" that's keeping inflation from reaching their 2% target (no mention of the 73% increase in oil's price since February; that's one of those inconvenient truths). Not helping the Fed is the fact that the Atlanta Fed has lowered their growth expectations to just 0.6%. The end result of this and their dovish statement is that the market believes a rate hike in June is off the table and that's a reason to celebrate.

Between the longer-term chart patterns showing a lot of whippy up and down moves and now the shorter-term charts showing the same thing it's making it more difficult to get a bead on this moving target. The only thing I can do is watch for the completion of some patterns and/or support and resistance lines to see how prices react and then trade accordingly. I'll start tonight's review with SPX.

S&P 500, SPX, Weekly chart

SPX has nearly retraced its entire November-February decline, stopping last week at 2111, 5 points shy of its November 3rd high near 2116. It has broken its downtrend line from July-November 2015, currently near 2090 but it's been chopping around the trend line since breaking above it on April 18th. That's not exactly bullish price action but it's not bearish yet either. A drop below Monday's low near 2077 would be a little more bearish since it would leave a failed breakout attempt but the bulls still have the potential to drive this at least up to 2116 if not the May 2015 high near 2135. The challenge for bulls is an overbought weekly chart up against tough resistance with a daily chart showing bearish divergence.

S&P 500, SPX, Daily chart

The daily chart below shows how SPX has been chopping around its July-November 2015 downtrend line and while the consolidation can be considered bullish, Monday's break of an uptrend line from February through the April 12th low has been followed by only back-tests of the trend line. The bounce pattern is also choppy and that has it looking a little more bearish than bullish but the bulls could easily overcome that with a stronger rally on Thursday.

Key Levels for SPX:
- bullish above 2111
- bearish below 2073

S&P 500, SPX, 60-min chart

The SPX 60-min chart below shows the bounce off Monday's low, which is so far just a 3-wave move and as such could be just an a-b-c bounce correction to the decline from last week. This interpretation says we should get ready for the next leg down, which could start right away Thursday morning or after a brief pop higher (two equal legs up from Monday points to 2101.66).

Dow Industrials, INDU, Daily chart

The Dow has the same pattern as SPX and following last week's achievement of the 18110 projection (two equal legs for a possible A-B-C bounce off the August 2015 low) and the top of a parallel up-channel for the price action since last August, it then broke down slightly and broke its uptrend line from February 11 - April 11. The bounce off Monday's low looks like a correction but it would achieve two equal legs up at 18108, only 2 points shy of testing the 18110 level again. It would be more bullish above 18120 but at the moment it looks vulnerable to a stronger decline.

Key Levels for DOW:
- bullish above 18,120
- bearish below 17,484

Nasdaq-100, NDX, Daily chart

NDX suffered a bearish event last Friday when it gapped down as a result of some key components suffering a negative reaction to earnings. It happened again from some more disappointing earnings reactions, namely AAPL, this morning. But it is last Friday's gap down that created an island top reversal after it had gapped up on April 13th, ran sideways and then gapped down last Friday. This is typically a strong reversal signal so it's currently on a sell signal and the first thing the bulls need to do is negate it by getting back above 4525, which is the little support shelf between the gap up and gap down. Today it gapped below its 200-dma, near 4424, but found support at its 50-dma near 4394 and made it back up to its 200-dma this afternoon before dropping slightly into the close. Was that the back-test to be followed by a bearish kiss goodbye tomorrow? That's the bearish setup. If it does drop lower, there could be stronger support near 4343, which is where two uptrend lines cross, one from June 2010 - November 2012 and the other from March 2009 - August 2015 (using the log price scale here).

Key Levels for NDX:
- bullish above 4600
- bearish below 4435

Russell-2000, RUT, Daily chart

As mentioned above, the RUT has been showing relative strength recently, especially compared to the techs, by continuing to push higher while the others either consolidate or pull back further. It's now only 4 points away from price-level S/R near 1160, which includes its December 29th high near 1161. But it's still well below its November high near 1204 while the blue chips challenge their respective highs. The RUT has rallied up to the top of a possible rising wedge pattern, the top of which will be close to the 1160 S/R level tomorrow and therefore it's worth watching closely to see if it will be strong resistance.

Key Levels for RUT:
- bullish above 1162
- bearish below 1119

10-year Yield, TNX, vs. KBW Bank index, BKX, Daily chart

The 10-year yield has been closely correlating to the prices of the bank stocks, as can be seen on the chart below. This makes sense since the higher the bond yields the more profitable the banks (many loans, including mortgages, are pegged to the 10-year yield while savings rates are being kept near zero). So if you want to know the probable direction of bank stocks just keep an eye on TNX.

There is a warning sign currently for bank stocks and that's because yesterday's high for TNX is so far a lower high than its March 11th high but not so for BKX, which has gone on to make a significantly higher high in April. Is it getting ahead of itself in anticipation of higher yields? Will the bond market support the Fed's efforts to raise rates further? Will the economy support the Fed's efforts? At the moment the bond market is telling us lower rates are coming, despite what the Fed wants, and that bank stocks have gotten ahead of themselves.

Notice the last divergence back in June-August 2015, where TNX started coming down but BKX held up into August and then crashed lower to "catch down" to TNX. Now we have an even wider disconnect and the warning here is that BKX could once again "catch down" to TNX.

KBW Bank index, BKX, Weekly chart

Taking a little longer-term look at the banking index, the weekly chart below shows it has almost made it back up to its 50-week MA at 71.23 with this afternoon's spike up to 71.09. Following this afternoon's spike up it then spiked back down so it's not clear if that was a little blow-off move or if there's still higher prices coming. Two equal legs up from February (for a possible a-b-c bounce correction) points to 72.13, which is a little shy of its downtrend line from July-December 2015, currently near 72.65. So there's at least a little more upside potential even for the bearish pattern but it doesn't turn more bullish until, and if, it can climb above 72.75. Watch TNX from here and see if it can recover today's decline to at least support BKX moving a little higher.

VIX Short-Term Futures ETF, VXX, Daily chart courtesy Tom McClellan

There's an interesting sentiment indicator when looking at the number of VXX shares outstanding, which as Tom McClellan describes it, acts as a "double-contrary indicator." Back in February he had pointed out how low the VXX shares outstanding had dropped, which showed a lack of interest in holding onto shares of an ETF that would benefit from a further selloff in the stock market (a further selloff in the stock market would spike VXX even higher). But instead of viewing this as a contrary indicator (lower interest in VXX, more bearish for the stock market) it should instead be viewed as a "smart money" indicator -- smart money gets in and out of VXX at important turning points for the market and the higher the number of outstanding shares the more likely the stock market is going to turn back down and vice-versa.

Yesterday Tom tweeted "VIX futures ETF extremely popular now. Can this possibly end well?" And if you look at his chart below you'll see the extreme spike as the stock market rally has progressed off the February low. This is smart money saying "I don't think so" when it comes to believing the stock market rally will continue. Can the market push higher? Absolutely. But this is another example of why you should be very cautious about the upside in an overbought market that has indexes pushing up against potentially strong resistance with bearish divergence (waning momentum). The market has been holding up very well, despite all the fundamental reasons why it shouldn't (unless you consider the Fed a fundamental reason for bullishness) but the problem is when it lets go it could do so with a bang and result in a selloff worse than what we saw in August and January.

U.S. Dollar contract, DX, Weekly chart

The US$ gyrated a little after the FOMC announcement this afternoon but then settled slightly higher than it was pre-FOMC. But it was somewhat meaningless and we're still waiting to see if the dollar is going to hold support near 94 or instead drop to about 93 before setting up a bounce back up toward the top of its year+ consolidation range, near 100. There's no change to my expectation for more consolidation this year before heading higher next year.

Gold continuous contract, GC, Weekly chart

On gold's daily chart I see a possible bullish sideways triangle since its March 11th high, which fits as a bullish continuation pattern. But on the weekly chart, shown below, I see price stalled at the top of a parallel down-channel from 2013 and the potential to roll over at any time. It could certainly be viewed as a bullish consolidation at the top of the channel as it prepares to break out so I'm ready for that possibility but I'm not sure a breakout would result in much more than a test of its January 2015 high near 1308 before starting a deeper pullback (possibly something more bearish). For the short term I think gold remains vulnerable to at least a larger pullback as long as it stays below last week's high at 1272.40. But a rally above 1273 could lead to a rally at least up to 1308.

Silver continuous contract, SI, Weekly chart

Since their highs on February 11th both gold and silver went sideways but silver's rally off the April 1st low for both of them led to a new high and that has had many precious metals analysts pounding the table about what a great buying opportunity this is for both gold and silver. I wonder if they're pounding the table because they want people to buy their metals so they can take their profits (you don't make money as a trader until you sell). Silver played catch-up in April and it too is now at the top of a parallel down-channel from 2013, near 17.60. Silver spiked up to 17.72 last week before dropping back down and it's been trying to bounce back up since Monday's low at 16.81. Along with the top of the down-channel there's also a price projection at 17.60 for an a-b-c bounce pattern off the August 2015 low and that was achieved last week. Until there's a breakout I think it's best to pass on the "opportunity" to buy silver here. Let it first prove it's going to be able to break out.

Oil continuous contract, CL, Weekly chart

Oil is looking a little stronger now that it has been able to break out the top of its down-channel from 2014, which is slightly above its 50-week MA at 43.24. As long as oil is able to hold above that level on a pullback it stays bullish. I'm not seeing bearish divergence on either its weekly or daily charts so that's a good sign for the bulls. The strength in oil has helped the energy stocks as well and that in turn has been helping the RUT. So if this can continue it could be the driver behind another rally leg for the stock market. The next level of resistance for oil is near 51, which is where it would test its October 2015 high and achieve two equal legs up from February (it could still be just an a-b-c bounce correction coming off very oversold in February). For now it looks bullish but keep in mind that it's getting overbought.

Economic reports

Thursday's economic reports are few and non-market moving. Friday we'll get the PCE numbers, personal spending and income, Chicago PMI and the final Michigan Sentiment numbers.


There's usually a head-fake move around the FOMC announcement followed by a reversal that carries into the close and then another reversal the following morning. That could mean this afternoon's rally attempt will be reversed Thursday morning. In reality all we have is a bunch of small corrective moves in both directions since last week's decline and that leaves the short-term pattern about as clear as mud as far as helping determine the next big move. The decline from last week looks impulsive and the bounce following it looks corrective (overlapping highs and lows) and that points to at least another leg down to follow the bounce. For this reason I give the nod to the bears but that means we should see a decline on Thursday. There might be a little pop higher at the open but the bearish pattern says it will be reversed quickly. So we should find out quickly whether or not the bears are going to get another chance or if instead the bulls are going to snatch the ball away them again.

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

Copy This

by Jim Brown

Click here to email Jim Brown
Editor's Note

Xerox has long been a synonym with duplication. I have to go "Xerox" these documents. The company announced in January it was going to split into two companies similar to Hewlett Packard and investors cheered or at least they bought the stock.


XRX - Xerox - Company Profile

Xerox has grown into a global services company that also provided document management solutions. The services segment provides business outsourcing services, customer care, transaction processing, finance and accounting, human resources, communication and marketing, consulting and analytics. The hardware segment produces copiers and printers of all sizes, capabilities and combinations.

The company announced in January they were going to split into two companies. One would be hardware and the other business services. They did this because they were under attack by activist shareholders. Carl Icahn was awarded three seats on the board. Shares rose from the February low at $8.50 to the April high at $11.50.

When they reported earnings this week the stock crashed back to $9.50. They missed on earnings and provided weaker guidance. Earnings of 22 cents missed estimates for 23 cents. Revenue fell -4% to $4.28 billion but beat estimates for $4.24 billion. The strong dollar caused a 4% decline in revenue.

The company also reported higher costs as a result of the current restructuring. They expect the restructuring to cost $220 million but provide more robust earnings growth starting in Q2. They incurred $126 million of those costs in Q1. The CEO said they were accelerating the cost reduction efforts and would begin to see results in Q2. In light of the restructuring costs they are delaying additional stock buybacks until 2017. The company reaffirmed its full year guidance.

Shares held at the $9.75 level for three days before rising to close at $10 today and the three-day high. Normally when a company goes through this process the current holders bail on the earnings news and a new set of investors buy the dip in expectations for the improvement in earnings in future quarters plus the added incentive of the split. We see it constantly where companies report a bumpy quarter, the stock crashes and a couple days later a rebound begins that propels the stock higher than the pre earnings levels.

I think the risk has been removed from Xerox. I believe we can buy it here at $10 and ride the rebound towards the "improved" Q2 results. Because of the recent low, our risk is minimal.

Buy XRX shares, currently $10. Initial stop loss $9.50.


No New Bearish Plays

In Play Updates and Reviews

Bullish Setup

by Jim Brown

Click here to email Jim Brown

Editors Note:

With the Apple disaster over and the market rebounding after the Fed meeting there is a good chance for a Thursday rally. The only pothole in the plan is the potential for a negative event out of Japan overnight. They are releasing an entire month of economic data plus the monetary policy statement from the Bank of Japan. Anything is possible with Japanese rates at -0.5% at today's close.

Assuming Japan does not self-destruct, the Facebook earnings after the close have the potential to produce a strong market bounce on Thursday. Facebook crushed earnings and shares were up $10 in afterhours trading.

Even if we are up on Thursday, I am more concerned about the market direction for next week. The biggest week of the earnings cycle will be behind us and typically the markets begin to fade. We need to be watchful for that to happen.

Earnings on deck for Thursday include AMZN, LNKD, SWKS, UPS, WYNN, WDC, MA, COP, AMGN and BIDU. Obviously the two big ones are Amazon and Linkedin.

The S&P is coiling under resistance so we should either expect a breakout or a breakdown soon.

Current Portfolio

Current Position Changes

KKD - Krispy Kreme

The call option was closed at the open on Wednesday.

VXX - Volatility ETF

The long position remains unopened until the VXX trades at $16.75.

NTAP - NetApp

The short position remains unopened until NTAP trades at $23.95.

LGF - Lions Gate Ent

The long position was stopped out at $20.65 this morning.

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

CONN - Conns Inc - Company Profile


No specific news.

Original Trade Description: April 20th.

Conn's operates as a specialty retailer of durable consumer goods and related services in the USA. The company stores offer refrigerators, freezers, washers, dryers, dishwashers, ranges, furniture, mattresses, home office products including computers, tablets, desks, printers, etc. They also sell consumer electronics including TVs, home theater equipment, etc. They operate more than 100 locations and were founded in 1890. Conn's is like a Best Buy with furniture and appliances.

Shares fell -23% after reporting earnings in late March and bottomes on April 8th. Revenue rose 7% and same store sales rose 3.6% excluding categories the company exited during the quarter. The furniture section saw same store sales rise +15.2% while electronics sales decline -13.3%. They reported earnings of 11 cents compared to estimates for 28 cents. The sharp earnings miss was caused by a major increase in loan loss reserves on their customer financing programs. The 60-day delinquency rate rose to 9.9%. Conn's finances 80% of its sales through its own in house financing plans. This is a short-term problem that will pass as they tighten up credit standards on future sales. They plan to open 10-15 new stores in 2016.

Earnings are May 31st.

An insider bought 250,000 additional shares last week for roughly $3 million. That is a huge vote of confidence.

The sell off was overdone. Shares have now rebounded above the consolidation highs for the last four weeks where the sellers were exiting. Wednesday's close was a four-week high.

I believe we can take a long position in Conn's and ride it up to the $16 level or possibly higher.

Position 4/21/16 with a CONN trade at $13.80

Long CONN shares @ $13.80, see portfolio graphic for stop loss.

No options recommended.
The June $14 is $1.45 and I think that is too expensive if we are only targeting $17 on the long position.

DPLO - Diplomat Pharmacy - Company Profile


No specific news. Shares rocketed higher intraday for a $1.57 gain but gave it all back in one tick in afterhours. There was one 500-share block that traded at 4:15 at $31.29. Since there was no news I am hoping this was just some idiot trading with a market order in afterhours and we will see the closing price of $32.86 return at the open.

The company scheduled an investor day for May 18th.

Original Trade Description: April 15th.

Diplomat Pharmacy operated as an independent specialty pharmacy in the USA. The company stocks, dispenses and distributes prescriptions for various biotechnology and specialty pharmaceutical manufacturers. A specialty pharmacy does more than just dispense pills. The provide other services for the patients like infusion, patient financial assistance, risk evaluation and medication strategies. Many of their patients are on complex programs with multiple high dollar drugs. The company has 16 locations and was founded in 1975.

DPLO had a rough six months. The Valeant problem with specialty pharmacy Philidor put a cloud over the entire sector. After DPLO reported robust earnings back in March, JP Morgan downgraded them saying they could decline 15%. The company guided below expectations but remained bullish. The analyst said he could not bridge the gap between the guidance and management bullishness. Shares dropped from $36 to $26 on the downgrade.

Fortunately, that was the bottom and shares have been moving up steadily. They accelerated last week after the company announced the availability of a new Lilly drug for Plaque Psoriasis. This confidence in DPLO by Lilly seemed to encourage investors.

Earnings are May 9th.

Shares are just over $30 with resistance at $35. With the potential for a market meltdown on Monday if the OPEC meeting in Doha does not go well, I am putting an entry trigger on the position.

Position 4/18/16 with a DPLO trade at $30.35

Long DPLO shares @$30.35, see portfolio graphic for stop loss.

No options because of wide spreads.

KKD - Krispy Kreme - Company Profile


Still holding at the highs after addition to the S&P-600. No specific news.

I recommended we close the option portion of this trade. That was done at the open this morning for a 100% gain in the position.

Original Trade Description: April 18th.

Krispy Kreme operates as a branded retailer and wholesaler of doughnuts, coffee, treats and packaged sweets. Who would have thought that Krispy Kreme Donuts would be impacted by falling oil prices and currency translation issues? They are a donut store headquartered in the USA. Unfortunately, not all their stores are in the U.S. KKD only has 297 stores in 41 states but they have more than 825 stores in 25 other countries.

There are 105 stores in Saudi Arabia, 136 in Mexico, 19 in the UAE, 14 in Kuwait and 12 in Russia. All of those countries have been impacted by the drop in oil prices and spike in the dollar.

In the last quarter sales at locations outside the U.S. fell -7.1% and expectations are for a continued decline in sales. The strong dollar caused revenue to decline -3.4% to $7.4 million in last quarter.

In late March they warned earnings would be in the range of 87-91 cents and analysts were expecting 93 cents. Shares fell -10% on the news. However, within four days the stock had rebounded to more than the level before the warning and have continued higher. Monday's close was an 8-month high.

They are running promotions to boost sales in the U.S. and they appear to be succeeding. On April 1st they gave away a free donut to anyone walking in their door, no purchase necessary. The stores were packed.

KKD only has $11 million in debt and $51 million in cash. They bought back 2.8 million shares in 2015. They have an authorized buyback for up to $144 million in shares for 2016.

Earnings are June 21st.

I am recommending we buy KKD shares with a trade at $16.50, just over today's high using a tight stop loss.

Position 4/20/16 with KKD trade at $16.50

Long KKD shares @ $17.05, see portfolio graphic for stop loss.


Closed 4/27/16: Long May $17 call @ .30, exit .65, +.35 gain

TRN - Trinity Industries - Company Profile


Creeping slowly higher. No specific news. 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.

VXX - VIX Futures ETF - ETF Profile


The VIX continued to decline as the Dow and S&P rallied out of the morning dip. Today's close was a new historic low. If the VXX continues to decline, I will lower the entry point for the long position. Eventually there is going to be a volatility event.

Original Trade Description: April 25th.

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.

Last Tuesday the VXX declined to 15.56 and the lowest level since August 10th. We had been long the VXX and that stopped us out of the position.

Since then the market has failed at resistance and spent several days in decline. With Apple's earnings likely to disappoint, it could cement the decline and lead us into the sell in May cycle.

Keith Bliss of the Cuttone Company, said research back to 1957 showed that last week was normally the best week of the entire second quarter. After last week the markets tended to "ebb" into June as the sell in May cycle takes hold as the earnings cycle wanes.

This year we have the Brexit vote in June, a likely Fed rate hike in June, the possibility for riots at the Republican convention in July, and many other factors that could weigh on the market.

I am proposing we get long the VXX and hold it because it is only a matter of time before we see another bout of volatility that could push it back to the 26-30 level. This means we could see some short-term bouts of calm if the markets try to make a new high again. Therefore, I am putting a stop loss on the position but I plan to reenter it the instant it appears volatility is starting to heat up. Hopefully the first long will be the only long we need.

Historically, there is very little long term risk with the VXX because the market will always have volatility spikes, but because it is a futures product there is a premium bleed if the ETF is held for a long time. If it were a regular stock we could just hold it until an event occurred. Since it is futures related, we have to have a stop loss.

With a VXX trade at 16.75

Buy VXX shares. Initial stop loss $15.25 and a new historic low.

WIN - Windstream Holdings - Company Profile


No specific news. Nice spike to a new 52-week high.

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 @ .38 cents.(Adjusted) 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


No news but LGF spiked to nearly $22 at the open and stopped us out at $20.65.

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.

Position 4/20/16 with a LGF trade at $19.65

Closed 4/27/16: Short LGF shares @ $19.65, exit $20.65, -1.00 loss


Closed 4/27/16: Long May $19 put @ 75 cents, exit .20, -.55 loss.

NTAP - NetApp - Company Profile


No news. Support at $24 holding but shares are not really moving higher. Resistance at $24.75 is firm.

This position remains unopened until NTAP trades at $23.95.

Original Trade Description: April 5th.

NetApp provides software, systems and services to manage and store computer data worldwide. Data ONTAP storage operating system that delivers integrated data protection, comprehensive data management, and built-in software for virtualized, shared infrastructures, cloud computing, and mixed workload business applications; E-Series storage systems for storage area network workloads (SAN); all-flash arrays that deliver input/output operations per second and ultralow latency to drive speed, responsiveness, and value from the applications that control key business operations; and hybrid arrays for mainstream business applications.

About two weeks ago the stock trend turned negative and has started accelerating downward after Sterne Agee and Macquarie both downgraded from neutral to sell. Sterne Agee said the downgrade came after the Q1 IT survey. The survey showed weakness in end-user budgeting for storage systems and upgrades. Spending had declined 10% year-over-year and was negatively weighted towards incumbent vendors. Agee said they did not expect revenue from ONTAP8 and SolidFire to offset enough share loss potential over the next year. The analyst said valuation appears compressed and the stock should underperform its peers.

Another analyst said deteriorating net income would keep the stock depressed.

Earnings May 25th.

Based on the chart shares may not find support until $21. The last two days shares have stalled the decline at just over $24. I am recommending we short NTAP with a trade at $23.95 and target $21 for an exit.

With a NTAP trade at $23.95

Sell short NTAP shares, initial stop loss $24.95


Buy long June $24 put, currently $1.25, initial stop loss $24.95.

XLF - Financial ETF - ETF Profile


New four-month high. This ETF reacts to the markets just as much as it does to financial news.

This is a May option position. Soon premiums will be evaporating faster than the ETF is accelerating. I am planning on closing this position over the next couple days. Assuming Japan does not meltdown over night, I expect the U.S. markets to be positive on Thursday. When I close it, I am only closing the call side. At the current 4 cents on the put side, there is nothing to be gained and should the market roll over it could come back into favor.

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 slowly 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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