Option Investor

Daily Newsletter, Wednesday, 7/6/2016

Table of Contents

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

Market Wrap

Some Volatility Following the Big Rally

by Keene Little

Click here to email Keene Little
Last week the market rallied hard and it was pretty much straight up into last Friday morning's high. Since then we've had a pullback and some large price swings while the market figures out what to do next. The waning momentum (bearish divergence) and price pattern suggest we could see at least a larger pullback correction before heading higher (maybe).

Today's Market Stats

There was a fair amount of trading volume today, which is what bulls want to see for a positive day and the market internals supported the green we saw in the indexes but we're seeing signs of weakening in the rally. Since the June 27th low, even as prices marched strongly higher, I watched the market internals weaken as the week progressed which created short-term bearish divergences. It provided a warning sign that we could be in the process of getting at least a larger pullback before heading higher, or we could be in the early part of what will become a more significant decline. Part of the issue with this week's volatility might be the market simply waiting now to get through Friday's NFP report before deciding what to do next.

Brexit worries resurfaced last night and drove our equity futures lower, which had us starting the day with a gap down. Shortly after the morning low the indexes shot back up and the Dow rallied a little more 200 points into the high just before the close. The turnaround might have had something to do with the Fed's record-setting reverse repo (flipping the expiring bonds) with $83.4B (hat tip to Vincent for that info). The operation completed at 13:15, which is when the market had a little swoon before chopping its way higher for the rest of the afternoon. Without that Fed operation it's anyone's guess what today would have been like.

There was very little news to move the markets, other than the Brexit worries, and the net result after today's price action is a pattern that is difficult to decipher as far as pointing in one direction or the other. All we can do is wait to see if last week's rally will get some follow through or if instead it was a 1-week wonder rally. I'll start tonight's review with the NDX weekly chart.

Nasdaq-100, NDX, Weekly chart

Last week NDX made it back up to three broken uptrend lines, all of had been broken with the decline into the June 16th low. The trend lines were the uptrend line from March 2009 - August 2015, the bottom of an up-channel from 2010 and a short-term uptrend line from February 8 - May 19. Following the June 16th low NDX bounced the next week and back-tested these trend lines before dropping lower into the June 27th low. The strong rally last week brought NDX to within spitting distance of the broken trend lines again and another test from here would be near 4490, which is also the location of the downtrend line from December 2015 - April 2016. If NDX gets above 4490 it will look more bullish, especially if it gets above its June 6th high near 4537. That would be the signal for a potentially strong rally to follow. Notice how MACD is holding above the zero line and a "reset" here followed by a turn back up would be a buy signal (although the last one in late May failed with a lower price high on June 6th). But if the bounce attempt fails and NDX drops below its June 27th low near 4179 I'd look for a drop to the bottom of a possible sideways triangle, which is the uptrend line from August 2015 - February 2016, near 4000.

Nasdaq-100, NDX, Daily chart

On the weekly chart above you can see the effort to hold onto the 50-week MA, near 4408. The daily chart below shows the confluence of the 20-, 50- and 200-dma's at 4404, 4404 and 4416, respectively. That's a lot of moving average S/R and the price volatility in the past two weeks has seen a struggle around these averages. Today it closed above all of them and remains potentially bullish above 4404 (closing basis). Notice too that price-level support at 4375 was tested today and held (this morning's low was 4375.72). At the moment it's not clear what kind of price pattern is playing out and until NDX drops below price-level support at 4282 it remains potentially bullish but be careful about the possibility for a lot of choppy price action between 4200 and 4500. While the weekly chart shows a potentially bullish setup on MACD (rounding back up from the zero line), the daily chart is showing the opposite as it starts to round over from the zero line. Watching to see which one wins...

Key Levels for NDX:
- bullish above 4500
- bearish below 4179

S&P 500, SPX, Daily chart

SPX bounced off support at its 50-dma, near 2077 (with a low at 2074), and ran back up to within a couple of points from closing yesterday's gap down, which is at 2103 (today's high was 2100.72). What for the possibility we'll get a gap close and then back down. I think we'll see at least one more leg down for its pullback from Monday, which is based on a small impulsive move down into this morning's low. That called for a bounce correction and then another leg down, possibly more. Two equal legs down from Monday's high (measured from this afternoon's high) points to 2066 so be careful chasing a decline to that level since it could reverse right back up again. Below 2066 would have it looking a little more bearish.

Key Levels for SPX:
- bullish above 2113
- bearish below 2025

Dow Industrials, INDU, Daily chart

Like SPX, the Dow bounced off support at its 50-dma and made it back up to a downtrend line from April through the June 8th high. So at the moment it's trapped between support and resistance and I'm watching to see which one will break first. It could be bullish above 18000 (more bullish above 18130) and bearish below 17638 (two equal legs down from Monday).

Key Levels for DOW:
- bullish above 18,130
- bearish below 17,140

Dow Industrials, INDU, 60-min chart

A little closer view of the Dow's daily chart can be seen on the 60-min chart below. The move down from Monday is a small impulsive (5-wave) move and that suggests today's bounce should not make a new high and instead turn back down to give us at least an a-b-c pullback from Monday. The projection shown at 17638 is for two equal legs in the pullback and a drop below that level would start to suggest something more bearish, such as a larger 5-wave move down from Monday. We can't know which pattern is more likely (or something entirely different) but this gives us something to watch as a way to see what price tells us (confirms or not).

Russell-2000, RUT, Daily chart

The RUT also held its 50-dma today, breaking it intraday in the morning, like yesterday, and that keeps things potentially bullish. A back-test followed by a rally above its June 23rd high near 1172 and its broken uptrend line from February-May, currently near 1164, would confirm the bulls remain in control. The first sign of bearish strength would be a drop below its 200-dma, near 1114, and then confirmed bearish below 1087. Watch out for the possibility of a lot of chop between the key levels.

Key Levels for RUT:
- bullish above 1173
- bearish below 1087

10-year Yield, TNX, Weekly chart

Last week I showed the TNX daily chart to point out a downside projection near 1.39%, which matched the July 2012 low at 1.394%. Yesterday is closed below 1.394, marking a new all-time low, and this morning it gapped down to open at 1.336. It then immediately bounced back to a high at 1.395 before consolidating and closing at 1.385, leaving a back-test of price-level S/R at 1.394. If it consolidates for a week or two we can expect lower but it's important to recognize this could be a strong support level to launch at least a higher bounce (with selling in bonds).

In addition to the relative weakness of bond yields vs. what we're seeing in the stock market (bearish non-confirmation for the stock market), there are other comparisons to track as a way of identifying additional signs of whether or not the stock market's strength is supported by other market sectors. The first comparison below is a set of three weekly charts with SPX at the top and then in the middle is a chart that shows the relative strength of the Consumer Discretionary sector (XLP) vs. Consumer Staples (XLY). The bottom chart is the relative strength of the banks vs. SPX.

SPX vs. XLP/XLY and BKX/SPX, Weekly charts

The idea here is that in strong economic times people will spend more money on discretionary items (depending on how much discretionary income is left over after paying the bills) whereas in a weaker economy (incomes not keeping up) people will still need the staples (toothpaste, toilet paper, etc.) but will cut back on discretionary spending. That's a sign of trouble for the economy and in turn the stock market. And in a strong market you want to see the banks leading the way, which has not been true since 2010. The relative strength of BKX to SPX is once again testing support from 2011, a break of which would likely indicate the banks are going to drag us lower.

Before leaving the banks, it's important to know what's happening in Europe, even in strong Germany. The banks are crashing and a large part of the blame goes directly to the ECB and their idiotic policies (same with the Fed). Banks can't make money in a NIRP environment and while the banks are being encouraged to lend even more money (or else park it with the central bank and get charged for doing so) they're already dealing with a climbing default rate on current loans. Many banks in the U.S. have even gone back to what got them into so much trouble before 2007 -- sub-prime loans to people who can't afford the loans (it's already being done with auto loans and student loans).

The Italian banks are in serious trouble, which might not be surprising considering it's not much better off than Greece. But Germany's largest bank, Deutsche Bank, is also in serious trouble and this is in the strongest country in the EU! Most of the big banks, including the U.S. banks, have derivatives exposure in the multiples of trillions of dollars. This is a ticking time bomb that the stock market has been ignoring for a long time. Banks stocks have been shunned by investors but U.S. bank stock prices are still closer to the top than the bottom (2009) and yet they're in far worse shape than they were back then. If you want to stay invested in the stock market you should at least be hedged by shorting the banking sector. They'll very likely be one of the leaders to the downside. Keep an eye on the relative strength vs. SPX.

The next comparison is the relative strength of the Transportation stocks vs. Utility stocks and then the RUT's relative strength vs. SPX.

SPX vs. TRAN/UTY and RUT/SPX, Weekly charts

When the economy is contracting there will be fewer shipments of products but people still need to keep paying their utility bills. Investors like the Utes for their relative safety and dividends. When the transports underperform utilities it's a sign the economy is slowing and the stock market will decline. That hasn't happened yet as the market fights to hold onto the highs of the past two years but the message is clear here -- bulls are skating on thin ice. The RUT is likewise underperforming SPX and that's another sign that traders are moving out of the riskier stocks into the relative safety of the big caps. There is always a move to safety by smart money before the stock market starts a serious decline. The amazing thing to me is how long this process is taking but it does support my opinion that the next decline will be far stronger than anything we've seen so far. When it's done most investors will want nothing to do with the stock market (especially since most will be wiped out).

I won't take up more space showing the above charts back in 2007 but I think it's very important to note that the two sets of charts above, into the October 2007 high, looked just like they do now. The bearish divergences have been ignored a long time and could continue to be ignored for much longer. We know the central banks and governments are buying the bond and stock markets (in addition to manipulating currencies) and that's helping (distorting) the stock market but it's also making it much more vulnerable to a downside disconnect (crash). Being long the market right now is much riskier and should be done with the understanding that you could wake up to a very nasty surprise one morning, especially since there's a lot of margin being used at the moment.

Margin Debt vs. SPX, Monthly chart

The chart below shows the amount of margin debt (blue vertical bars) being used to hold stock and you can see how its peaks and troughs coincide closely with the stock market. What's more important to note is that at stock market tops we see less margin being used (the bearish divergences are shown with the black lines). The stock market tops often because it simply runs out of buyers. The officially sanctioned Ponzi scheme, known as the stock market, constantly needs new buyers willing to pay higher prices to those who are selling and when those buyers fail to show up we'll see the sellers start to overwhelm the buyers. Many times there's a catalyst for strong selling but tops are usually associated with waning upside momentum and the drop in margin debt since the peak in 2015 is a big warning sign here -- there are fewer buyers willing to risk margin to buy more. Match this up with the sets of charts above and it doesn't take a rocket scientist to recognize the danger signs for bulls. They're currently ignoring the "Thin Ice" signs and are merrily skating across the pond.

U.S. Dollar contract, DX, Weekly chart

The US$ is consolidating beneath its 50-week MA, near 96.50, but should work its way back up toward 100 over the next couple of months. If it drops below its June 23rd low at 93.02 I'd start thinking a little more bearishly about the dollar but so far it continues to follow my longer-term expectation for a large sideways consolidation before breaking out of the 92-100 range in another rally leg next year.

Gold continuous contract, GC, Weekly chart

Gold appears to be in a mini-blowoff move higher -- higher prices with weakening momentum is typically what happens to the precious metals when the late-to-the-party traders scramble to get aboard the rally (when mainstream publications recognize the trend and urge their readers to buy). If gold rallies much above 1418 I'll be impressed but two equal legs up from its December 2015 low points to 1417.50 and that projection crosses its downtrend line from September 2011 - October 2012 in another couple of weeks. That makes for a great upside target and then a reversal back down for at least a pullback correction before rallying higher. There is still the risk that the 3-wave rally off the December low is just a correction to the longer-term downtrend and once complete we'll see gold head for a new low, possibly below 1000.

Oil continuous contract, CL, Daily chart

For the past several weeks I've shown the oil weekly chart to point out resistance near 51 (price projections, October 2015 high and the broken uptrend line from 1998-2008) and how oil has been consolidating/topping near this resistance. Topping is still a distinct possibility and the choppy pattern off the June 9th high suggests we'll see a fast breakdown if it loses support near 45.80 (today's low was another test of support). But there's a descending wedge that has formed off the June 9th high and that's a bullish continuation pattern. Most times a triangle pattern points to one more leg to complete the larger move, which is up in this case. If the bullish pattern is correct we're going to see a rally up to at least price-level S/R near 58.50 and maybe the May 2015 high at 62.58. This pattern says you don't want to be short oil right here and instead look for a pullback Thursday as a buying opportunity (stop just below 45.80). But if support near 45.80 breaks we could see a very strong decline, in which case you're not going to want to be long.

Economic reports

Tomorrow morning we'll get the ADP Employment report, which is expected to show +152K jobs, a drop from +173K in May. The NFP report on Friday is expected to show +180K, a big improvement from the +38K in May. The actual number may or may not have much of an impact since the Fed has essentially been removed from the equation for the rest of the year.


The stock market continues to hold up in the face of deteriorating fundamentals and as shown on the charts above, in the face of deteriorating technical as well. This can continue for longer than we think possible, especially since central banks have now made it their mission to prevent a stock market selloff. But the market is bigger than the CBs and that's one of the reasons why I think it's so vulnerable now -- faith in the CBs' ability to prop the market up could be quickly dashed in a decline that gets away from everyone. Just as there is only the "good faith of the U.S. government" supporting our dollar, faith in the Fed is waning quickly and the consequences could be severe.

On top of weakening fundamentals and technicals, the worst time for the stock market has historically (since 1950) been between July 17th (July 15th is opex Friday this year) and September 27th. If the stock market holds up into opex next week I'm thinking of stuffing a few put options into my portfolio. I already have some but I want to see how the market performs between now and the 15th before adding to my short position (full disclosure, I am net short the stock market).

Good luck in the coming week 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



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New Plays

Live Streaming

by Jim Brown

Click here to email Jim Brown
Editor's Note

Social media is trying to become relative and combat YouTube with multiple offerings of live streaming video. Will it work? I cannot believe I am actually recommending Twitter as a long play but the outlook appears to be improving. If their new live streaming efforts pay off we could see an entirely new Twitter emerge.


TWTR - Twitter - Company Profile

Twitter, Inc. operates as a global platform for public self-expression and conversation in real time. The company offers various products and services, including Twitter that allows users to create, distribute, and discover content; and Periscope and Vine, a mobile application that enables user to broadcast and watch video live. It also provides promoted products and services, such as promoted tweets, promoted accounts, and promoted trends that enable its advertisers to promote their brands, products, and services; and subscription access to its data feed for data partners.

Twitter's monthly active users have flat lined for many months with almost no growth. New users come into the system, get confused and overwhelmed and then leave just as quickly. There was nothing "sticky" to keep them on the system unless they were a news junkie or addicted to the next wild comment from Donald Trump.

Twitter is trying to change that with Twitter Live. They are testing the concept this week with a live twitter video feed from Wimbledon. The video shows up in the left side of the screen and the right side has a running commentary of tweets on the topic. Twitter has already announced several live events they are going to stream. They paid $10 million to the NFL to stream 10 of the Thursday night games. Live news stories are also being tweeted.

Analysts have been pleasantly surprised and claim "this may actually be something useful from Twitter." If they can successfully transform themselves from a 140 character shorthand rant site into a site with thousand of live streams of everything under the sun then they may actually avoid obsolescence.

Shares have been rising since the $14 low on June 10th and appear poised to break over resistance at $18. By reinventing themselves as a live stream video portal they open up a significant advertising opportunity and could actually attract some big money buyers looking for a social media acquisition. Apple and Google are the permanent favorites constantly mentioned as possibly having interest. If they see that Twitter is suddenly becoming relevant again, they could pull the trigger.

This time last year Twitter was trading around $38 and their historic high was around $75 so even without an acquisition offer they could rebound significantly.

Twitter has been a slow mover even though it is up $3 in three weeks. If it were to move over that $18 resistance it could pick up speed as investors come back for a second or third look and realize the company is evolving.

Do not buy this with expectations for a quick bounce and out. If you enter this position, you should look for a slow move to $20 and then reevaluate the position. Over $20 could trigger some real short covering.

Earnings July 26th and we could hold over the event depending on the news flow and stock level.

Buy TWTR shares, currently $17.20, initial stop loss $15.35.

I am not recommending an option because of the recent history of slow movement. However, a long-term option may be the correct way to play this position. Your risk is known in advance and the cost of entry is very low. Here are some examples.

Sep $19 Call $1.04
Dec $20 Call $1.51
Jan $20 Call $1.64


No New Bearish Plays

In Play Updates and Reviews

Not 18,000

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow squeaked out a 78-point gain but closed well under resistance at 18,000. The dow failed to rebound as strongly as the S&P, which did rebound back to resistance at 2,100. The prior "weak market" winners of MCD, PG, MMM, V and DD were the biggest losers on the Dow. That would seem to suggest there was a risk on market developing but I am not going to jump to that conclusion.

Resistance is still in control and with the Dow closing 82 points below strong resistance that means a big move could run out of steam before it gets to that 18,000 level. S&P futures are down -5 as I type this.

Current Portfolio

Current Position Changes

ATHM - Autohome
The short position in ATHM was stopped at $21.65.

Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

BULLISH Play Updates

EXAS - Exact Sciences -
Company Profile


No specific news. Back at a new 9-month high close.

Original Trade Description: June 25th.

Exact Sciences Corporation, a molecular diagnostics company, focuses on developing products for the early detection and prevention of various cancers. The company develops the Cologuard, a non-invasive stool-based DNA screening test for the early detection of colorectal cancer and pre-cancer. Its Cologuard test includes a protein marker to detect blood in the stool, utilizing an antibody-based fecal immunochemical test. The company has a collaboration, license, and purchase agreement with Genzyme Corporation, as well as with MAYO Foundation for Medical Education and Research for developing tests to detect lung, pancreatic, and esophageal cancers.

Shares of EXAS fell from $18.50 to $7 in October after the U.S. Preventative Services Task Force, an independent panel of health care experts, issued preliminary screening test recommendations that did not include Cologuard as a recommended product. The draft listed Cologuard as an "alternative" screening test. Exact Sciences protested strongly about the classification.

On June 14th, the same task force issued its final cancer screening recommendations and clarified the inclusion of Cologuard. The information was accidentally leaked and the panel had to release the report earlier than the planned June 21st date. With the final recommendation for Cologuard the company has begun advertising strongly and sales should increase. Cologuard is now an A-rated preventative service under the Affordable Care Act.

Earnings July 26th.

Shares have broken out of their 9-month consolidation base and could close the gap back to $18 in the coming weeks.

Position 6/27/16:

Long EXAS shares @ $11.50, stop loss $9.45.

No options recommended.

HPE - Hewlett Packard Enterprise - Company Profile


No specific news. Decent rebound to erase Tuesday's loss.

Original Trade Description: June 2nd.

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

HPE reported adjusted Q1 earnings of 42 cents and in line with estimates. Revenue of $12.711 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.419 billion.

For the current quarter, HPE guided to earnings of $1.10 to $1.14. For the full year, they expect $1.85-$1.95 and that was more than analysts expected at $1.89. They increased free cash flow +101% to $1.1 billion for the quarter.

The good news came from their plans for the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. They are receiving $2 billion from the Tsinghua transaction which closed in early May and the money will be used for share repurchases. In 2016, HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.

This means over the next couple of months we should see significant share activity as funds position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016. $2.5 billion of that is in an "accelerated" buyback program. The board authorized another $3 billion in buybacks to bring the current authorization to $4.8 billion.

They also announced a tax-free spinoff of their services division to Computer Sciences Corporation (CSC), which is expected to close in March 2017. This will produce another $8.5 billion in value to HPE shareholders in the form of $4.5 billion in equity in the combined company and $1.5 billion in a cash dividend and the removal of $2.5 billion in debt from HPE.

Earnings Aug 23rd.

HPE shares have shaken off their May weakness and closed today at a historic high. I am recommending we buy this stock in anticipation of additional fund investors moving in ahead of future dividends, buybacks and the spinoff.


Position 6/28/16: Long HPE shares @ $17.50, see portfolio graphic for stop loss.

Position 6/3/16: Long August $20 call @ 40 cents. No stop loss.

Previously closed 6/24/16: Long HPE shares @ $18.40, exit $18.61, +.21 gain

SCTY - Solar City - Company Profile


No specific news. Clinton reiterated her goal of 500 million solar panel installations during her two-term presidency. Wishful thinking?

Original Trade Description: June 27th.

SolarCity Corporation designs, manufactures, installs, monitors, maintains, leases, and sells solar energy systems to government, residential, and commercial customers in the United States. The company provides solar energy systems; solar lease and solar power purchase agreements; mypower loan agreements; grid control/energy storage systems; zep solar mounting systems; and proprietary software, including SolarBid sales management platform, SolarWorks customer management software, PowerGuide proactive monitoring solutions, and Energy Designer, a proprietary software application used by field engineering auditors to collect site-specific design details on a tablet computer. It also sells electricity generated by solar energy systems to customers.

SolarCity has had a troubled past with the rise and fall of solar based on the whims of governments and the on again-off again investment credits and tax rebates. SolarCity is still humming right along and building up their base of installed systems into one giant annuity that will pay for decades to come. The problem is that it takes cash to build and install those systems that they sell to customers. Cash up front for a long and profitable payout.

SolarCity was co-founded by Elon Musk. He also started Paypal, SpaceX and Tesla. Last week he (Tesla) offered to buy SolarCity, where he is the largest stockholder and Chairman of the board, for $26-$28. Tesla shares cratered. SolarCity shares spiked for one day then fell back again. Numerous analysts were against the plan. Now shares are rising again.

Elon Musk believes he can marry his battery business with the solar business and have a winning combination. He already makes battery backups for your home but they run off regular utility company power. With SolarCity he can power those battery systems with solar and it makes a lot more sense for customers.

Shares have established a base at $21 and with the $26-$28 offer under consideration along with "other strategic alternatives" it would appear there is limited downside.

Earnings August 8th.

Position 6/28/16:

Long SCTY shares @ $23.40, see portfolio graphic for stop loss.

BEARISH Play Updates

ATHM - AutoHome - Company Profile


No specific news. Shares peaked intraday at a 21.65 high but that was exactly our stop loss so we are out of this position.

Original Trade Description: June 29th.

Autohome Inc. operates as an online destination for automobile consumers in the People's Republic of China. The company, through its Websites, autohome.com.cn and che168.com, delivers comprehensive, independent, and interactive content to automobile buyers and owners, including professionally produced content that comprises automobile-related articles and reviews, pricing trends in various markets, and photos and video clips; automobile library, which includes a range of specifications covering performance levels, dimensions, powertrains, vehicle bodies, interiors, safety, entertainment systems, and other unique features, as well as manufacturers suggested retail prices; new and used automobile listings, and promotional information; and user forums and user generated content. Autohome Inc. also offers advertising services for automakers and dealers; dealer subscription services that allow dealers to market their inventory and services through its Websites; used automobile listings services, which allow used automobile dealers and individuals to market their automobiles for sale on its Websites.

In April, Telstra Corp, which owns 55% of Autohome, said it was going to sell a 48% stake to Ping An Insurance Group for $1.6 billion. CEO James Qin is now leading a revolt against his previous benefactor that helped launch the company and get it listed on the NYSE. There is a suit and Qin is launching a rival bid. When the company needed startup capital Telstra was the investor. Qin and other minority shareholders representing 11% of the outstanding shares have lodged a petition with the Grand Court of the Cayman Islands where the company is registered. The suit claims Telstra's representatives on the board of Autohome allegedly acted in bad faith and breached the rules. Qin is trying to form a coalition with multiple private equity firms to launch a competing bid. Qin made a firm offer of $31 a share in April including a bank letter of credit to finance the deal and it was rejected. The next day Telstra said it was selling its shares for $29.55 to Ping An. Qin's group countered at $31.50 that caused a peak in Autohome shares at $32.15 in expectations for a bidding war that never appeared.

The board is deeply divided and Telstra will not provide any supporting documents for the "purported" sale to Ping An. Telstra has 5 directors on the board and there are 5 independent directors. On May 13th Telstra convened a board meeting to approve the deal. The 5 independent board members refused to show up so there was no majority. The 5 Telstra directors appointed a 6th director on the spot, completely against the corporate rules, and the 6 directors approved the deal. The group aligned with Qin filed the petition with the court to put a hold on any acquisition until the proper documents are submitted and the full board can review the documents vote on the matter. Telstra still refuses to provide any documentation and the fight continues.

Meanwhile shares are crashing. On Monday, the company reported the CEO Qin and the CFO had been replaced and five new directors had been appointed. The company stated the sale of 47.4% of the outstanding shares to Ping An had been completed on June 22nd. It appears the hostile takeover has been completed but the court fight is ongoing.

On Wednesday, shares closed at a historic low at $20.54. This company appears broken and normal shareholders are fleeing to the exits. There was no bounce on either is the last two days when the markets were up big.

Zacks changed their rating to Strong Sell. Credit Suisse changed their rating to Sell.

Earnings August 3rd.

Position 6/30/16:

Closed 7/6/16: Short ATHM shares @ $20.50, exit $21.65, -1.15 loss.

QQQ - Nasdaq 100 ETF - ETF Profile


Minor rebound that came to a dead stop at downtrend resistance.

Original Trade Description: July 2nd.

The Dow has struggled with the 18,000 level since last November. Eventually there will be a breakout but I strongly doubt it will be during the summer doldrums between July 4th and Labor Day. The volume will be to low and other factors are weighing on the index. The 30 Dow stocks are all exposed to the strong dollar and falling pound as a result of the Brexit. I would be very surprised if less than two-thirds of the Dow stocks did not warn for Q3 on the strong dollar problem. With Q2 earnings starting on July 11th, i would expect some investors to begin moving to the sidelines to avoid the rush.

The S&P 500 has solid resistance from 2,100 to 2,115. It has failed at those levels on every attempt since August of last year. With earnings expected to be weak, economics weak and Europe weak, I would expect the S&P to fail at those levels again.

The Nasdaq has strong resistance at 4,900 and 4968. These are lower highs from the peak last November. The biotech sector is still weak and Merrill Lynch just downgraded the semiconductors. Oil prices are likely to remain around $50 for the rest of the year and that means the bloom is fading on the energy stocks.

The Nasdaq 100 ETF (QQQ) is approaching solid resistance at $110. I actually doubt it will get there but that appears to be the target. If the QQQ reaches that level I would recommend shorting the ETF. I know that is a big ticket item for Premier Investor readers but there are no low dollar index ETFs that will accomplish the same thing. I am going to recommend a long put in place of the actual short.

I would like to enter the position at $110 but that would take about a 200 point gain on the Nasdaq 100 ($NDX) and I seriously doubt that will happen.

Since we cannot count on that $110 level being reached I am going to recommend buying the put with a trade at $106.85. If the index does go higher then we can target the $110 level as well.

With a QQQ trade at $106.85

Buy August $106 put, currently $2.05. No initial stop loss.

VNET - 21Vianet Group - Company Profile


No specific news. New closing low.

Original Trade Description: July 2nd.

21Vianet Group, Inc. provides carrier-neutral Internet data center services to Internet companies, government entities, blue-chip enterprises, and small-to mid-sized enterprises in the Peoples Republic of China. It offers hosting and related services to house servers and networking equipment in its data centers, and connects them through a data transmission network; and other hosting related value-added services.

In June 2015 the Chairman of the board, Kingsoft Corporation and Tsinghua Unigroup International proposed a deal to take the company private. Shares were trading around $20 at the time. On Thursday the same group rescinded their "non-binding" go private offer. The group said "after careful consideration, the group had determined not to proceed with the proposal under the current circumstances." Those circumstances were not described.

After keeping the stock price around $20 for the last year based on this offer the group decided to pass on the deal. While it may have had something to do with the earnings, I suspect it had more to do with the current problems with taking companies private in China. Qihoo (QIHU) and YY (YY) are also struggling. The China Securities Regulatory Commission is considering limits on the numbers of reverse mergers from previously foreign listed companies. There are worries they could impose an outright ban.

In an attempt to counter the drop in the stock the company announced a $200 million share repurchase plan. However, in the first sentence reads, "The Board has authorized, but not obligated, to repurchase up to $200 million in outstanding shares within the next we months." The key words there are "not obligated" which means they do not have to buy the shares if they change their minds. This is a Chinese company and the generally accepted rules are rarely followed. This is just another ploy to try and support the stock price.

Earnings August 24th.

Position 7/5//16:

Short VNET shares @ $9.57, see portfolio graphic for stop loss.


Long August $9 put @ 85 cents. No initial stop loss.

VXX - Ipath VIX Short Term Futues ETN - ETN Profile


Minor bounce at the gap down open but the rebound pushed the VXX to a new 4-week low. We are probably going to be in this position for a long time as it declines to new lows well under $13 or even $12 this summer.

Original Trade Description: June 22nd.

The VXX is a ETF type product that is based on the Volatility Index futures. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

We have played the VXX before with big gains. The object is to short it on a bounce and then hold the position until the volatility fades again.

On the big declines last week the VXX spiked to $17. Back in January and February is spiked to $30 on the market corrections. While I do not expect that to happen from this lower level, I do expect some volatility to appear regardless of the vote outcome.

I am recommending we enter a short position with a return to $17. If it continues higher I would add to that short at $20 and again at $25 and then we wait for the post event decline in the volatility and the return to $13 or lower.

Because this is a flawed product it will always go lower. It has already had several 1:4 reverse splits to keep it from being delisted back in November 2010, October 2012 and November 2013. If it falls under $10, they will do another reverse split and start the decline all over again.


6/24/15: With a VXX trade at $17, now short VXX @ $17, no stop loss.

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