Option Investor

Daily Newsletter, Thursday, 5/5/2016

Table of Contents

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

Market Wrap

Doji Day In Front of Nonfarm Payrolls Report

by Keene Little

Click here to email Keene Little
The stock market struggled to put together a rally today but the sellers were not aggressive either. The market essentially went on hold while waiting to get through the Nonfarm Payrolls report Friday morning.

Today's Market Stats

For this week I am in a location that has spotty internet service (less than had been anticipated when I reserved the rental house in Costa Rica) and therefore tonight's wrap will be a little shorter than my usual diatribe. Some of you might think that's a good thing since I do tend to get a little verbose (wink). I tried to get charts updated during the day and a quick comment about each to ensure I get the report uploaded before possibly losing my connection. Next week (Thursday again for me as Tom and I will switch one more week) I'll be back to a stronger and more reliable connection. Like most everything, you don't realize how important these technological marvels are until you lose them.

The market sank further today but each new low over the past couple of days is showing less strength -- bullish divergences are showing on the charts. That could be traders were simply pulling away from the market as we approach Friday morning's Payrolls report or it could be an ending pattern that's setting up at least a bounce correction and the Payrolls report could be the catalyst, even if it's because it's not a bad report (OK report could be good).

Oftentimes we'll see chart patterns that point to an expected move and the price pattern for the indexes looked to me like ending patterns for the decline rather than something more immediately bearish. As I'll cover for the charts, there is one particularly strong bearish pattern that calls for an acceleration of the selling so I wouldn't say a bounce on Friday is guaranteed but as a game of odds that we play I will say the odds favor a bullish reaction to the NFP report. We'll certainly know soon enough.

There were no economic reports of interest today and in light of what I mentioned about my internet, I'm just going to jump right in and review the charts to see what they're telling us. I'll start with the SPX top-down review.

S&P 500, SPX, Weekly chart

Following the intraweek poke above its downtrend line from July-November, into its April 20th high, SPX rolled over and it's bringing MACD with it, which is about to cross back down. It could jump back up to a new high and leave a lower MACD high but that would be just a guess right now. The real test, if reached, will be the 50-week MA, currently near 2026. If it instead jumps back up and reaches its downtrend line, now near 2088, we'd get to see if it will continue to hold as resistance.

S&P 500, SPX, Daily chart

Over the past week SPX has broken a few layers of support once it broke free of its July-November 2015 downtrend line on April 28th. It broke its 20-dma, bounced back up to it the next day, broke an uptrend line from March 24th (the bottom of a now-negated expanding triangle top) yesterday and bounced back up to it today for a back-test. So far all of this price action is bearish but it hasn't yet tested its 50-dma, currently near 2043. Interestingly, this is also near its 2015 closing price at 2043.62 and obviously it would be more bearish below 2043. There are hints of weakness in the selling and that could be setting the market up for a bounce after we get through the NFP report Friday morning.

Key Levels for SPX:
- bullish above 2100
- bearish below 2033

S&P 500, SPX, 60-min chart

The hints of waning selling pressure can be seen in the bullish divergence on the 60-min chart below. Forgetting about the NFP report in the morning I look at this chart as a warning to bears since it looks like it's setting up for a bigger bounce and the NFP report could be the catalyst (even if it's going to be just a relief rally). The short-term pattern suggests a quick low in the morning followed by the start of the bigger bounce and if that happens we'll see a quick bear trap set in the morning. But if we get a strong break below 2043 and no immediate bounce back up, there is a bearish wave count (a series of 1st and 2nd waves to the downside) that calls for an acceleration lower, which is reason enough to be cautious about thinking of immediately buying a morning dip.

Nikkei 225 index vs. S&P 500 index, 2013-present

Keeping an eye on the Nikkei 225 index for clues about the bigger pattern shows the NIKK now nearing potential support at an uptrend line from February-April and obviously the bulls want to see support hold and then a continuation higher. But if trendline support fails to hold and especially if it drops below its April low near 15700 (today's close was 16147) there's little question in my mind that SPX would follow and close the unusual gap that's present after SPX rallied hard off the February low (for what? Certainly not for fundamental reasons).

Dow Industrials, INDU, Daily chart

The Dow is also looking like it could test its 50-dma, currently near 17524, before setting up a stronger bounce (it might not reach its 50-dma if we get just a quick minor new low Friday morning). If the Dow drops below its 50-dma and its April 7th low near 17484 it would open an air pocket below that down to price-level support at 17140 and its 200-dma at 17117. If we do get a decent bounce keep an eye on possible resistance at its downtrend line from November through the April 1st high, currently near 17770, and then its 20-dma, near 17865.

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

Nasdaq-100, NDX, Daily chart

This week NDX broke support at its uptrend lines (June 2010 - November 2012 and March 2009 - August 2015. A second break of these uptrend lines, following the breaks in January and February, is bearish if not recovered quickly. As with the other indexes, the short-term pattern supports the idea that we're going to see a bigger bounce into next week before continuing lower. But if it drops sharply lower on Friday I don't think it will find some support until the 4200 area.

Key Levels for NDX:
- bullish above 4525
- bearish below 4213

Russell-2000, RUT, Daily chart

Since the March 7th high for the RUT it had risen inside a parallel up-channel, the bottom of which was broken slightly yesterday and more so today. Like the other indexes it also seems to be heading for potential support at its 50-dma, near 1102. A sharp break below 1100 could lead to a fast drop to the next support area near 1070. But if the 50-dma holds on a weekly closing basis I think there's a good chance for a bounce correction into next week.

Key Levels for RUT:
- bullish above 1162
- bearish below 1100

10-year Yield, TNX, Daily chart

Treasury yields have been in decline since the previous bounce peaked on April 26th and today it closed on its uptrend line from February-April. As drawn on the TNX (10-year) chart below, this uptrend line could be the bottom of a sideways triangle, which calls for one more bounce back up to the top it before heading lower in June. A more immediately bearish wave count calls for a sharp decline in yields where TNX will drop well below its February low. A drop below price-level S/R at 1.65% would confirm the more bearish pattern. But if it does head back up, presumably in reaction to Friday morning's NFP report, look for 1.90% to complete the bearish triangle pattern.

KBW Bank index, BKX, Weekly chart

The banking index is at an interesting point as it has dropped back down to potential support near 66.50. From a bearish perspective the bounce off the February low into the April 27th high was a near-perfect back-test of its broken 50-week MA, at 71.20 with a high at 71.09, and that's been followed by a strong move back down, which has it looking like a bearish kiss goodbye. Now it's back down to potentially strong support and obviously the bulls want to see this back-test result in a bullish kiss goodbye. We'd then have to wait to see which side blinks first and allows either a break above the 50-dma, currently near 71, or below S/R near 66.50. A drop below 66.50 would also leave a confirmed 3-wave bounce correction off the February low so the bulls really do need a bounce on Friday to keep their hopes alive.

U.S. Dollar contract, DX, Weekly chart

The US$ was in real danger of breaking down last week when it dropped below 93. But as the dollar often does, it dropped below support and then created a bear trap on Tuesday with its strong reversal back up. Tuesday's low at 91.88 is now the key level for dollar bulls to hold otherwise we'd likely see the dollar work its way down toward its 200-week MA, currently near 87. However, if this week's reversal is the real thing we should now see a return to the top of its trading range, near 100 by August and then one more trip back down before setting up the next rally leg later this year.

Gold continuous contract, GC, Weekly chart

Gold rallied up to 1302 on Monday, 2 points (so far) shy of the 1308 target I've been watching for. This is a test of its January 2015 high and if it rallies above that level we could see the rally make it up to at least its 200-week MA, currently near 1324. Gold hasn't been anywhere near this MA since it dropped below it in early 2013. But so far the new high is showing bearish divergence against the March high and the risk from here is the start of at least a larger pullback if not the another leg down to a new low, such as to the 1000 support level.

Oil continuous contract, CL, Weekly chart

Oil is pulling back a little but it could be for just a back-test of its broken down-channel, the top of which is near its 50-week MA at 42.95. If that holds as support and oil makes it higher than its April 29th high at 46.78 we'd likely see a test of price-level resistance at 50.92 (its October 2015 high) before we'll get a decent pullback. But a drop back below support near 42.95 would open the door to at least a larger pullback if not back down to the bottom of its down-channel, which will be near 20 in August. Gold and oil down together?

Economic reports

Following a quiet day for economic reports we'll get the anticipated Payrolls numbers before the bell Friday morning. The numbers for total Nonfarm Payroll and Nonfarm Private Payroll are expected to be lower than March, as was the ADP number on Wednesday. As long as it comes in around a Goldilocks 190-200K we probably won't see much of a market reaction since it won't move the meter for the Fed.


Some important support levels have been broken this week and the market is looking vulnerable to more selling. But this week's selling pressure has been waning and that sets up the possibility for at least a larger bounce correction of the decline. We have an important NFP report before the bell tomorrow and it's likely to be the catalyst for a bigger move. However, I see the potential for a head-fake move out of the gate tomorrow and then a reversal so be careful of getting caught in that.

If we get a snap to the downside and it doesn't reverse quickly, such as after only 30 minutes of selling, the bears could take over in a big way and I'd look to short bounces for a little longer. But if a quick spike down is followed by a reversal back up I think that should set up at least a multi-day bounce correction, maybe something more bullish.

The opposite scenario is also true -- a quick pop up, if it stays below Tuesday afternoon's highs, could lead to a reversal back down. In that case I'd watch for a minor new low with bullish divergence before thinking about looking for a buying opportunity (for at least a trade). A rally above Tuesday afternoon's highs, such as SPX 2069, would be a good signal that the bottom is in for now and then look for at least a higher bounce into next week.

So Friday morning has the potential to be whippy and the initial direction has a good chance of being reversed in the first 30 minutes. Trade carefully by letting the dust settle before trying to determine which direction the market really wants to go.

Good luck and I'll be back with you next Thursday (due to my travel schedule, Tom and I are switching).

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

Overpromise, Under Deliver

by Jim Brown

Click here to email Jim Brown
Editor's Note

GoPro is always on the verge of a miracle rebound. There is always some new software, a new camera or a new product just around the corner. Unfortunately, they always seem to have a problem in execution.


No New Bullish Plays


GPRO - GoPro - Company Profile

GoPro develops hardware and software associated with capturing, managing, sharing and enjoying engaging content. They offer cameras and all the accessories associated with affixing those cameras to any object in order to capture action videos.

GoPro soared onto the scene in late 2014 and shares ramped up to nearly $100 until the execution problems began to appear. After owning the action camera sector for several years they are now facing a growing onslaught of competitors with far deeper pockets and bigger teams of software engineers. GoPro cameras remain some of the higher priced in the sector because of their history but that is quickly changing.

They reported earnings on Thursday after the bell. They posted a loss of 63 cents missing estimates for a loss of 60 cents. However, revenue of $183.54 million beat estimates for $171 million BUT it was a -49.5% decline over the year ago quarter of $363 million and a profit. They shipped 701,000 cameras but that was a -47.8% decline from last year. They affirmed guidance for revenue of $1.35 to $1.50 billion for the full year BUT they are delaying one of their biggest revenue drivers for the year.

The Karma drone was supposed to be released in the first half of 2016 and was expected to provide a revenue boost for the company. In the earnings conference call, they said the release of the drone would be pushed out into the holiday season. How they are going to meet their prior revenue estimates after losing six month of drone sales is a mystery. When asked about it on the conference call the CEO basically said, "trust us." This is especially troubling when SZ DJI Technology is rapidly monopolizing the drone market. DJI has been called the Apple of the drone industry. They sold and estimated 70% of the consumer drones sold in 2015. Now they will have another six months to flood the market with multiple drone models before the GoPro Karma even gets off the ground.

Shares fell slightly in afterhours but I expect them to make a new low in the weeks ahead. They closed the afterhours session at $10.16 and the historic low is $9.01. The afterhours low was $9.57.

With a GPRO trade at $9.50

Short GPRO shares, initial stop loss $11.50. I will lower that stop once we get past Friday.

In Play Updates and Reviews

Jobs, Jobs, Jobs

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market was dormant ahead of Friday's Nonfarm payroll report. The S&P lost only half a point after being up +9 in the morning and down -6 in the afternoon. The index gravitated back to flat at the close as investors lacked direction ahead of the payroll report.

The ADP Employment on Wednesday came in significantly lower than expected at +156,000 jobs compared to estimates for 195,000. The U.S. weekly Jobless Claims this morning came in at 274,000 and the highest level in more than a year. The Challenger Employment report showed layoffs accelerated in April to 65,141 announced layoffs. The period from January through April has seen 250,061 announced layoffs and that is the highest for that period since the financial crisis.

This suggests the Nonfarm Payroll number will miss the +200,000 consensus forecast and be well below the +215,000 number for March. A sharp decline in new jobs would be seen as fed positive since they are not going to raise rates with falling jobs and a 0.5% GDP. However, bad news could actually be seen as bad news that the economy is suddenly slowing and that could be negative for the market.

The Russell 2000 lost -5 points to close at the low of the day at 1,107 and below initial support at 1,110. The next material support is 1,095 with a possible speed bump at 1,100.

The small caps are leading the market again only they are leading it down. The Russell close was a three week low and under 1,095 would be a six-week low.

The Russell decline is affecting the small cap sector where this newsletter operates. I struggle with the concept of shorting stocks that are already in a steep decline but I also have a problem with buying the dip unless there is a potential bottom forming.

The S&P is clearly in a decline but there is support at 2,040 that could stall the drop. I do not think we will see a lasting rebound but we could have another short squeeze at any time. The payroll number on Friday could be a trigger.

Current Portfolio

Current Position Changes

VXX - Volatility ETF

The long position was closed at the open.

INSY - Insys Therapeutics

The short position was entered with a trade at $13.60.

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. Shares skillfully avoided our stop loss at $16 with a low at $16.02.

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

TRN - Trinity Industries - Company Profile


No specific news. Small caps were the biggest losers 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 was flat again today and is not reflecting the volatility in the market. We closed the position at th eopen and that was almost the low for the day.

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

Closed 5/5/16: Long VXX shares @ $16.75. Exit $16.40, -.35 cents.

WIN - Windstream Holdings - Company Profile


Windstream reported a much smaller loss than expected. The company reported an adjusted loss of 23 cents compared to estimates for 54 cents. Revenues declined slightly to $1,373.4 million and missed estimates for $1,378.8 million. However, product revenues rose 11% to $32.4 million. WIN bought back $75 million in shares in Q1. The company ended the quarter with 1,430,700 household subscribers.

Shares plunged at the open to $8.49 from the $9.31 close on Wednesday. There was a strong rebound to close back at $9.08 and right at the high for the day.

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

INSY - Insys Therapeutics - Company Profile


The Biotech Index picked today to try and rebound and succeeded in closing positive. INSY dipped at the open to trigger the position but recovered slightly in the afternoon on the biotech rebound. They filed a 10Q today and it had more disclaimers than actual facts.

Original Trade Description: May 4th.

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.

Position 5/5/16 with an INSY trade at $13.60

Short INSY shares @ $13.60, initial stop loss $14.60

NTAP - NetApp - Company Profile


No specific news. Shares only declined 8 cents in a weak market. With no news and futures falling we could get a breakdown on Friday.

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


No material movement on the XLF. The ETF was as flat as the market.

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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