Option Investor

Daily Newsletter, Wednesday, 5/4/2016

Table of Contents

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

Market Wrap

Data, Earnings Deflate Market

by Thomas Hughes

Click here to email Thomas Hughes


Sluggish data and soft earnings weighed on the market today, NFP and unemployment are still ahead. Today's reports, both earnings and economic, did little to alleviate concerns. Earnings remain mixed but generally OK, if slightly better than a -8% decline for the S&P 500 is OK. Economic remains positive in the long term but shows slowing and weakness in the near.

Selling started in Asia although trading in the region was mixed. The Japanese Nikkei fell more than -3%, again, driven on floundering economics and lack of faith in the BOJ but the Chinese indices fell less than -1%. European indices tried to move higher in early trading but were overcome by negative sentiment sparked by weakness in Asia and poor earnings. By the end of the day they were in negative territory with losses in the range of -1%.

Market Statistics

Futures trading indicated a near -0.75% drop for most US indices as the early session began. Trading remained near the low of the session going into economic release at 8:30AM and held that level afterward and into the opening bell. The indices posted a large drop as soon as the bell sounded, the S&P 500 shedding a half percent in the first two minutes of trading. Momentum was strong the first 15 minutes of the day and drove the indices down to the early low, just shy of -1% for the broad market.

By 9:15AM an early bottom had been reached, a small rebound recouped about half of the initial losses and then more data at 10AM. ISM Services and Factory Orders were better than expected but not enough to recover the remainder of the day's loss. The market did move higher after the release but the move was choppy and did not last long. By 11:30 the market was back at the lows of the day, bounced again and then moved back to retest the lows again by 1PM. Afternoon trading was more of the same chop, below the mid point of the day's range, leaving the indices near the lows at the closing bell.

Economic Calendar

The Economy

The first release today, Mortgage Applications, shows that applications for new mortgages fell by -3.4% from last week. This is due in part to a slight uptick in interest rates. The rate for a 30 year fixed is now 3.87%, up 2 bps from last week. This week's is evidence of slowing in the housing market, which remains steady over the long term. Mortgage apps are up 0.4% year over year.

ADP Employment released their monthly employment report this morning at 8:15AM. According to them the pace of job creation slowed in April, contrary to the jobless claims data. ADP job creation ran at 156,000, short of the 195,000 expected, and the smallest increase in over a year. Within the report small business led with 93,000 new jobs, large business lagged by creating only 24,000 jobs. Services led with an addition of 166,000 offset by declines in goods producing and manufacturing. Construction added 14,000 new jobs.

Productivity and Labor Cost preliminary reports for the first quarter suggest that growth may have been weaker than the 0.5% estimate we received two weeks ago. First quarter productivity fell by -1.0%, more than expected. Increases in output were offset by hours worked and wages paid. On a year over year basis productivity is positive, up 0.6%. Labor costs rose by 4.1%, 3% in hourly earnings offset by -1% productivity. On a trailing 12 month basis labor cost are up only 2.3%.

ISM Services and Factory Orders were released at 10AM, both better than expected. ISM services rose to 55.7 from 54.5 versus an expected 54.7. This is a 1 year high. Within the report Business Activity fell -1% to 59.8 but Employment and New Orders both rose, gaining about 3% each to hit 56.7 and 59.9 respectively.

Factory Orders came in at 1.1% versus an expected rise of 0.5%. Shipments rose 0.5%, inventory rose 0.2% and unfilled orders fell -0.1%. The real driver of orders was New Orders, which rose 0.8% mainly on transportation equipment.

The Trade Deficit was smaller than expected. It shrank 13.9% to -$40.44 billion.

The Dollar Index

The Dollar Index was able to rebound somewhat in today's action. The data was enough to put a bid in the dollar although job creation appears to have weakened. The index was able to gain about 0.36% but the move was not strong. The indicators are consistent with a near term bottom, divergent from the recent low and rolling over in the nearer term, so the move could continue. The index is well below the short term moving average so a reversion to it is certainly possible. The only thing to drive the dollar over the next few weeks will be data, until the next round of central bank meetings, so ranges may dominate trading. Today's data did little to change overall outlook; one area appears strong while another appears weak. Support is at $92.62, with possible upside target near $94.25.

The Oil Index

Oil prices tried to rally in the early part of the session but a larger than expected build of US inventories curbed gains. WTI had been trading over $44.50 when news that stockpiles had gained 2.8 million barrels hit the wires. This, along with recent increases in Saudi and Russian output, adds to curent supply imbalance regardless of outlook for next year. The news sent prices heading lower, erasing most of the gains, to leave WTI trading near $43.50.

The Oil Index fell more than -2% and below the 1,120 support line in today's action. This line is coincident with the short term moving average and the 61.8% retracement line so this break could become significant to near term direction. The indicators are moving lower in confirmation of the break and pointing to lower prices. Bearish MACD is rising and stochastic %D is falling below the upper signal line so it looks like this move could have strength. If the index remains below 1,120 a move lower becomes more likely, next support target is near 1,050.

The Gold Index

Gold fell in today's session, shedding about -01.35% in a choppy session. This is the third day of decline since hitting peak and consolidation or decline may continue in the short term. The dollar appears to have hit a bottom and this could lead to range bound trading for both it and gold. Data will be the major mover of this market for the next few weeks with resistance at $1300 and first target for support near $1275 should prices pull back further. A break above $1300, should one come, would be very bullish for gold and could take it to $1325.

The gold miners fell today as well, the miners ETF GDX falling nearly -5% compared to gold's -01.35%. This move helps confirm the top set three days ago but does not rule out further gains. The ETF may consolidate at this level and will likely retest resistance before making a full reversal, if it does. The miners are still tied to gold, and gold to the dollar, so today's move could easily be reversed by Friday's releases, if not other news before now and then. If the NFP is as weak as the ADP it is very possible the dollar will fall back to the low and send gold back to $1300.

In The News, Story Stocks and Earnings

Randgold Resources reported earnings today and may have had some impact on the miners in general. The company reported a miss but there is a silver lining, evidence of the impact of higher gold prices. The miss is due to a -11% decline in production caused by commissioning and technical issues in certain mines offset by a 19% increase in quarter over quarter profits, a 25% increase in year over year earnings attributable to a 9% increase in average gold prices and lower input costs. Regardless, investors were not pleased and sent shares sinking in pre-market trading. Shares fell more than -5% at the open and -11% by the close.

Shares of Priceline fell more than -10% after revenue, profits and guidance fall short of expectations. The company is hurting from adverse conditions in several regions due to political instability, terrorism and the Zika virus. Guidance for the next quarter is in a range between $11.60 and $12.50, -16% below the consensus. Late day trading saw some buyers step in, enough to create a hammer doji, but not enough to recover the day's losses.

Health insurer Humana reported better than expected earnings, $1.86 versus $1.81, and reaffirmed full year guidance. According to the company is seeing improvement in most areas of business but remains cautious on it exposure to the healthcare exchanges. Shares of the stock opened with a loss near -1% but regained more than half that during the day. Despite the recovery prices remain below the short term moving average which may prove to be resistance.

Tesla reported after the bell but shares of the stock were moving long before then. Shares were down in early trading on low expectations for earnings, then extended those losses on reports two executives were leaving due to problems with the Model X roll out. Shares of the stock had been down about -2% and then extended those losses on the mid-day news. After hours trading saw the stock recover all of the earlier loss and add another 4% after the report of earnings. The company's reported loss was -$0.57 per share, one penny less than consensus.

The Indices

The indices began the day in retreat, hit new lows almost immediately, tried to rally and then moved lower again. Today's action left the indices at or below support targets in many cases, and indicate the market is ready to move lower if given the right push. Today's action was led by the Dow Jones Transportation Average, about -0.90%. Today's action created a medium bodied black candle which set a new one month low and came to rest on the 7,760 support target. The indicators are both pointing to lower prices and this level has not been strong in the past so it looks like a dip below 7,760 is coming. This move could go all the way to 7,500 if the index closes below today's support level.

The next largest decline was posted by the tech heavy NASDAQ Composite which lost nearly -0.8%. Today's action brings the index below the 4,750 level, the upper shadow on the candle suggesting resistance at that level. The index is now at a 2 month low and indicated lower by both MACD and stochastic. Both indicators are in decline and now confirmed by the short term moving average which has begun to move lower. Next target for support is near 4,650.

The S&P 500 fell about -0.60% today, created a medium bodied black candle and came to rest on a support target. The indicators are both confirming the move to support and suggest it will continue to be tested although momentum is not yet strong. A break below support, near 2,050, could take the index down to 2,020 in the near term with targets below 2,000 in the short term.

The Dow Jones Industrial Average made the smallest decline, about -0.56%, and came to rest on potential support. Today's action broke below the short term moving average and hit the support target near 17,620 where sellers were halted. The indicators are bearish and moving lower, indicating lower prices or at least a testing of current support, so it looks like a touch to 17,500 is very possible. An outright break of 17,500 could take the index as low as the long term trend line near 17,250.

The market appears to be moving lower and may extend losses over the next two days. Neither the data nor the earnings are inspiring rally and the way things are going it's hard to believe outlook will improve any time soon. Earnings may be, in general, better than expected but they are still down more than -7% from last year with forward outlook in decline so better than expected is the only thing positive about them. Economic data shows long term growth is still in the economy but that growth is slowing, no reason to expect earnings to grow or the market to move higher. Tomorrow will see quite a few more earnings reports and a little bit of data but nothing as earth shaking as the NFP report due Friday.

The way I see it now, the economy and market are stuck between a rock and hard place. If the NFP is weak like the ADP it could drag the market to new lows on slow growth, if it better than expected it may raise the specter of rate hikes, and that could drag the market to new lows, if it is in the sweet spot it may not be enough to overcome declining earnings outlook and that could result in selling too. I remain cautious in the near term, anticipating a test of support in some form and waiting for the next bounce.

Until then, remember the trend!

Thomas Hughes

New Plays

Falling Drug Sales

by Jim Brown

Click here to email Jim Brown
Editor's Note

Insys Therapeutics ran into some bad news and trouble with the FDA. They beat on earnings but guidance was disappointing.


No New Bullish Plays


INSY - Insys Therapeutics - Company Profile

Insys is a specialty pharmaceutical company that develops and commercializes supportive care products. Their main drug (Subsys) is a sublingual fentanyl spray for cancer pain in opioid-tolerant patients.

They warned before earnings that Q1 sales of Subsys would only be in the range of $61-$62 million after Q4 sales were in the $91 million range, up +38%. In the year ago quarter Subsys sales were $70.5 million.

The problem is what the FDA said was improper off-label marketing that expanded the use of the drug last year. With that practice halted analysts believe the drug's best days are over.

Compounding the revenue problem was a decision by the FDA to move an approval date for Syndros from April 1st to July 1st. Syndros is a reformulation of the marijuana based drug marinol. Insys believes this could be a big seller in the hundreds of millions of dollars.

While that may be good for Insys in the future the trader community is leaving the stock until we get closer to the approval date.

Insys reported earnings of 11 cents that beat estimates for 8 cents. Revenue from Subsys was $62 million. Shares have been declining since the earnings report because of the revenue warning.

Earnings July 28th.

With an INSY trade at $13.60

Short INSY shares, initial stop loss $14.60

In Play Updates and Reviews

Closing in on Support

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P dropped early to trade at 2,047 for most of the day before rebounding a couple points at the close. On the intraday chart the S&P hit 2,047 at 11:AM and traded with that level as support until 3:PM. That suggested a possible short covering spike at the close but when it came at 3:30 it was immediately squashed.

Sellers were camping out at 2,052 all afternoon and the index closed at 2,051. In theory the lack of a closing rebound after two days of significant declines would suggest a continued drop on Thursday followed by an uptick in short covering Friday afternoon.

The real support is 2,040 and we could easily test that on Thursday. I would expect an initial rebound because that is a strong level. It may take 2-3 days to press through if the market is determined to move lower.

We had positive economics and positive earnings on Wednesday and it did not help. With the ADP Employment report coming in much lower than expected at 156,000 compared to estimates for 195,000 there could be some real worry over what to expect in the Nonfarm Payroll report on Friday. That could translate into weakness at Thursday's close.

Current Portfolio

Current Position Changes

XRX - Xerox

The long position was stopped out at $9.40.

NAV - Navistar

The long recommendation has been cancelled.

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

BLOX - Infoblox - Company Profile


No specific news. The Sohn Conference is now offer and Starboard Value CEO Jeffrey Smith did not make a presentation on BLOX. Shares were only down 15 cents today in an ugly market.

Original Trade Description: May 2nd.

Infoblox designs, develops, manufactures and sells network control solutions worldwide. Their primary product manages domain servers handling the routing of Domain Name Systems (DNS). In order for the Internet to work a domain name like OptionInvestor.com has to be converted to an actual IP address by looking up the DNS in a domain server or appliance. Because of the security issues surrounding this process the DNS system is a high priority and highly dynamic process.

I know that sounds kind of wonky but Infoblox has created an entire suite of products that make the process easy and secure.

Earnings May 26th.

Activist investor Starboard Value is the same fund that attacked Yahoo, Depomed, Macys, Advance Auto Parts and Darden Restaurants to name a few. They were just awarded a four board seats on the Yahoo board.

Starboard announced a 7% stake in BLOX on the 22nd saying the shares were undervalued. This suggests Starboard is about to announce changes they would like to see to improve shareholder value at BLOX. With the Sohn conference later this week, Smith typically announces his new projects in hopes of seeing a bump in the stock price and instilling a little fear in the board of the company to be attacked.

Last week the head of sales for BLOX left the company and the CEO is filling his spot temporarily. That sounds like a possibility for Starboard to agitate for change.

I am proposing we take a position in BLOX ahead of the Sohn Conference in hopes Starboard touts his new position. The stock has rallied to $17 where it came to a dead stop. A breakout over $17 could be explosive.

Position 5/3/16

Long BLOX shares @ $16.86, initial stop loss $16.00

NAV - Navistar - Company Profile


Navistar collapsed after competitor Cummins (CMI) posted disappointing earnings and fell -$4. Navistar was guilty by association. This recommendation has been cancelled.

Original Trade Description: April 29th

Navistar manufactures and sells commercial and military trucks, diesel engines, school and commercial busses and provides service on these products worldwide.

For the last several years, Navistar has been under a cloud. In 2010 the company said it had developed an advanced truck engine that would meet EPA certification requirements. In 2011 the engine failed to pass the tests for EPA certification. In 2012 after making some changes to the engine they reapplied for certification. The EPA staff objected saying there were "several serious concerns" that needed to be resolved before certification. Despite the objections the company released several statements characterizing the application as a "milestone" in development and was proceeding in a timely manner. The company planned to start production on the engine in 2012. It never happened and the SEC fined the company $7.5 million last week for improper statements in 2012. The CEO making those statements was forced to step down in 2012.

Fast forward to today and all those problems are behind the company now that the SEC finally reached a determination. Navistar is producing new state of the art trucks and engines and the stock is in rebound mode.

In their recent earnings they reported a loss of 40 cents that was significantly better than the estimate for a 77 cent loss. Revenue of $1.77 billion was short of estimates for $2.05 billion. However, the company guided for $9.0 to $9.25 billion for the full year.

Earnings June 2nd.

On Thursday, shares spiked to resistance at $16.50 and then retreated in the weak market on Friday. I believe they will break through that resistance level and test the next level at $20.

Recommendation cancelled.

TRN - Trinity Industries - Company Profile


No specific news. Small caps were hit hard once again.

We have a July call option so we have time to wait for a rally.

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 VXX only gained 20 cents despite a sharp decline in the markets. The VIX rose +3%. I am concerned we are going to see another short squeeze that will tank the ETF. I am recommending we close this position. It is not moving up as fast as the market is declining.


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.

Position 4/29/16 with a VXX trade at 16.75

Long VXX shares @ $16.75. Initial stop loss $15.00 and a new historic low.

WIN - Windstream Holdings - Company Profile


The company announced a dividend of 15 cents payable July 15th to holders on June 30th. Shares spiked a whopping 7%. Earnings on Thursday should be good if they are that confident about the dividend. We will not be exiting the option position.

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.

XRX - Xerox - Company Profile


No specific news. Xerox finally dipped exactly to our stop loss at $9.40 intraday. There was no news. We simply entered the long position at the wrong time as the market turned weaker.

Original Trade Description: March 27th

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.

Position 4/28/16

Closed 5/4/16: Long XRX shares @ $9.95. Exit $9.40, -.55 loss. .

BEARISH Play Updates

NTAP - NetApp - Company Profile


No specific news. Shares only declined 10 cents in a weak market. I really tightened up the stop loss to $23.25 in case we get a market rebound tomorrow.

Original Trade Description: April 25th.

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.

Position 4/29/16 with a NTAP trade at $23.95

Short NTAP shares @ $23.95, initial stop loss $24.95


Long June $24 put @ $1.17, initial stop loss $24.95.

XLF - Financial ETF - ETF Profile


Big drop at the open with the major banks down but shares rebounded again in the afternoon. This is the third consecutive day for that pattern. We need to see a real breakdown to put us into a decent position on the May put option.

This ETF reacts to the markets just as much as it does to financial news.

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

Closed 4/29/16: Long May $23 call @ 19 cents, exit .58, +.39 gain.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.

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