Option Investor

Daily Newsletter, Monday, 7/11/2016

Table of Contents

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

Market Wrap

Break Out Or Fake Out

by Thomas Hughes

Click here to email Thomas Hughes


The S&P 500 broke out to new all time highs today. The question now, will these new highs hold or is this a market fake out? Aside from geo-political risk and slow global growth there are at least 2 major hurdles for the US market; earnings season and central bank policy. Earnings season began in earnest today with the release of Alcoa's report after the bell and it doesn't look good, Q2 and full year 2016 estimates continue to fall. Central bank speculation is going to heat up over the next 2 weeks as we await the next FOMC meeting. Between then and now are numerous opportunities for Fed related speakers to move the market, 14 scheduled events featuring a Fed speaker this week alone.

International markets were mostly higher. In Asia trading was dominated the results of the Japanese election to reaffirm Prime Minister Shinzo Abe's ruling party. The landslide victory is expected to make it easier for an additional round of Abenomic stimulus for the country, expected to be roughly 2% of GDP. The Nikkei rose nearly 4% on the news, indices in China and elsewhere were positive but gains were much smaller.

European indices closed with gains in the range of 1.5% to 2.11% on a combination of factors including the Japanese vote, receding Brexit fears, US markets hitting new all-time highs and the selection of a new British Prime Minister. The selection of a new PM was a bit surprising, this move was not expected until later this summer or fall at the earliest. Theresa May is the choice, the only remaining candidate following the drop-out of rival Andrea Leadsom. The switch is expected to take place Wednesday night and paves the way for untangling Britain from the EU.

Market Statistics

Futures trading indicated a positive open all morning, an open that would put the SPX at a new all time high. After the bell the indices began to move higher, pushed up against resistance and drifted across all within the first few minutes of trading. The next hour saw them drift sideways, move down to retest early support, and then bounce to make another new high for the day. Today's highest level was hit just before 1PM, after that the indices drifted sideways/down to end the session near the middle of today's range.

Economic Calendar

The Economy

No official economic data today. There are quite a few reports this week, mostly coming on Friday. Tomorrow we'll get Wholesale Inventories. Wednesday Import/Export prices and the Fed's Beige Book top the list. Thursday is weekly jobless claims and PPI. Friday brings us CPI, Empire Manufacturing, Retail Sales, Industrial Production, Business Inventories and Michigan Sentiment.

Moody's Survey Of Business Confidence fell to another new low. The diffusion index fell -1.2 points to hit 25.1, the lowest level in more than 3 years. Mr. Zandi notes a sharp drop in post-Brexit sentiment, most visible in responses from EU businesses, and a possible stall in the EU economy. US and Pacific Rim business remains upbeat but has also seen some decline. South America is the weakest.

Earnings expectations continue to fall as we approach the peak of the Q2 earnings cycle. So far 23 of the 500 S&P 500 companies have reported, 14 have beaten earnings estimates and 11 have beaten revenue estimates. The Q2 blended rate is now -5.6%, a drop of -0.4% over the past two weeks alone. While the lower bar may make it easier for more companies to beat estimates it will not alter the fact we are facing a 5th quarter of earnings decline and may indicate forward expectations will continue to fall as well. The 12 month forward looking EPS remains flat and does not indicate growth as is predicted for the end of the year.

Looking out to the 2nd half of the year, full year 2016 and next years estimates expectations have also fallen in the past week. Growth is expected to return next quarter but that growth is now only 0.7%, down a half percent over the past 2 weeks. Growth is expected to expand into the 4th quarter but that growth is now only expected to be 7.2%, down -0.3% since last report. Full year 2016 earnings growth is only expected to be 0.5%, down -0.2%, and full year 2017 growth lost a tenth to hit 13.5%. Outlook remains very bullish for next year but I remain wary of near to short term growth while we are in an environment of falling expectations.

The Dollar Index

The Dollar Index moved higher to set a new 4 month intraday high. The index moved as high as $96.79, above the 50% retracement level, but was not able to hold the level by the close of trading. The 50% retracement level held as resistance for today but may be breaking down. The index has been consolidating just below this level for about 3 weeks now and looks like it will be moving higher. The indicators are bullish and support a move higher although at this time momentum is in decline. That being said there is some strength in stochastic, it is making a bullish crossover of the upper signal line. Should the index continue to move higher and break above resistance a move to next target at $97.50 is likely with a move to $98.65 possible. It's two week's to the FOMC, they are not expected to make any changes to policy to expected easing from the BOJ, the BOE and the ECB are all possible catalysts to move the index higher.

The Oil Index

Oil prices were a bit volatile today, nothing new there. The price of WTI began the day in negative territory, down about -1.50%, only to move higher later in the morning. By 9:30AM WTI was trading as high as +1.25% only to fall back to break even soon after. By the end of the session price had fallen back below flat-line to close with a loss of -1.37%. Driving today's move was ongoing supply/demand imbalance and outlook for the future. The latest news shows Canadian production is rebounding from wildfire related outages in the oil sands region and the US rig count is rising, both offsetting hopes that demand would begin to chip away at already high global supply. WTI is now trading below $44.75 and at a new 2 month low.

The Oil Index remains range bound, moving higher in today's session despite the drop in oil prices. The index gained a little more than a half percent making a small bounce from the short term moving average. The moving average is just above the mid-point of the range, near 1,120, and poining higher although there is little indication the index will move higher. The indicators are both consistent with range bound trading, trending near the middle of their respective ranges. It looks like the index is treading water waiting for an indication of which way to go. This may come down to earnings and expectations and, of course, oil prices.

The Gold Index

Gold prices drifted lower in today's session but remain near $1350. Spot prices lost about $2 in a quiet session as investors shift focus to the central banks. The Brexit and potential fall-out is helping to support prices but a strengthening dollar could limit further upside, if not cause correction. A dovish fed could help fuel a rally in gold, should the dollar weaken, but this is not a guarantee in light of expected easing from the other central banks. $1350 appears to be near term support, a move below this level could send gold down to test $1310 or $1300. Resistance is near $1375, a break to the upside will like go to $1400 or higher.

The Gold Miners ETF opened with a loss today but was able to move up off of the early lows and close with a small gain. Today's action is the fourth day of trading within a tight range at/near the 3 year high. The indicators are bullish and point to higher prices although there may be some more consolidating before then. Momentum is falling off a bit, one indication of potential consolidation, but stochastic is showing strength through crossover of the upper signal line so a deep correction does not look likely. Should the ETF pullback first target for support s near $27.50. If it moves higher next target for resistance is near $31.35.

In The News, Story Stocks and Earnings

Shares of Nintendo, traded on the Japanese exchange, shot up nearly 25% on the success of the new Pokemon Go game. The game is just another play on the wildly popular franchise but has sparked a new avenue for gaming and tech companies to pursue, augmented reality. Unlike virtual reality which immerses users in a digital world, augmented reality superimposes digital characters (in the case of Pokemon Go) on top of real life video. Microsoft CEO Satya Nadella says it could signal a new goldmine for tech companies, such as his own.

Microsoft is currently working on an augmented reality device called the HoloLens. To put the popularity of Pokemon Go in perspective, in 6 days it has surpassed Tinder's count of active daily users and is fast approaching Twitter, numbers that no business involved with handhelds, VR or gaming should ignore. Also in the news today, Microsoft announced a partnership with GE for cloud computing. The deal will bring GE's Predix platform to Microsoft's Azure cloud, available to industrial businesses. Microsoft moved up about 0.75% but remains below resistance at the $53 level.

WalMart is offering free shipping for all online purchases this week, an attempt at competing with Amazon's Prime Day. Prime Day is a 24 hour period in which Amazon will offer spectacular deals to its Prime customers. Anyone who is not a Prime customer can get a free 30 day trial in order to take advantage of the deals. This is the 2nd Prime Day Amazon has held, last years was fairly successful as a boost to summer sales slump. Shares of WalMart gained about 0.35% to trade at a level -18.5% below the all time high. Shares of Amazon gained more than 1% to trade at a new all time high.

Alcoa reported after the bell and surprised with a beat on earnings and revenue. The company was able to produce $0.15 per share of EPS, $0.09 was expected, on revenue of $5.3 billion. On a year over year basis revenue is down about -10% on lower aluminum and alumina pricing despite a 4% increase in organic sales, earnings are also down year-over-year. Looking forward the company is expected to complete the split into two companies, up- and down-stream segments, later this year and has issued guidance for double digit growth in 2017. Shares of the stock gained about 7% on the news are headed to test resistance at the top of the range, near $11.25.

Seagate Technology, maker of disc drives and other memory hardware, pre-announced results today after the bell. The company says it expects to report revenue well above the previous range, beating expectations, along with an increase in margins and additional lay-offs planned for later this year. The news sent the stock shooting up by more than 12.5%.

The Indices

The indices moved higher today and one at least, the S&P 500, set a new all time high. Despite setting that new high however the broad market made the smallest gains of the day, only 0.34%. Today's candle is not very strong, more of a spinning top than anything else, and come with a bit of upper shadow so there is some resistance present. The indicators are bullish so higher prices or testing of new resistance should be expected in the near term. The break to new highs is a good sign but I remain skeptical, a few more days trading at this level would go a long way toward helping my confidence in the market. Should the index continue higher from this point next upside target is about 130 points higher, near the 2,260 level.

The next largest gain in today's session was made by the Dow Jones Transportation Average. The transports gained 0.37% but did not come close to setting a new all time high, that level is still about 12% above today's close. Today's action created a small spinning top type doji candle that was held in check by the 7,750 resistance level. The indicators are bullish and moving higher so a test or break of this level is very possible. Next target to the upside is just below the 8,000 level.

The Dow Jones Industrial Average made the 2nd largest gain in today's session, about 0.45%. The blue chips created a small white bodied candle with notable upper shadow, just below resistance at 18,250 and within 0.7% of the all time high. The indicators are pointing higher so a further test or break of resistance is likely, based on Alcoa's results it could come tomorrow. A confirmed break above the all time high could take it up to 19,000 should the seasons earnings and forward outlook support.

The largest move in today's session was made by the NASDAQ Composite. The tech heavy index gained just shy of 0.65% in a move that falls well short of the all time high. Today's move was able to break above one resistance level, 4,950, but the 5,000 level held. The indicators are pointing higher so a test of 5,000 is likely, along with a possible a break through to test next upside target near 5,040.

The market seems to want to move higher and today's action is promising. A break to new highs may attract new money to the market and drive it higher but I remain skeptical. Alcoa's and Seagate's earnings are a nice surprise but by no means a guarantee the season will produce positive growth, or that forward outlook will remain positive. Until we know for sure, as sure as we can, that Q3 earnings outlook will not turn negative I think there is sufficient risk of reversal to keep me on the sidelines. And there is still the upcoming FOMC meeting, potential Brexit fall-out and a rising dollar to weigh on the market and impact earnings. Don't forget, there are 14 scheduled speeches from Fed officials this week, enough to cause quite a bit of market volatility.

Until then, remember the trend!

Thomas Hughes



Welcome to our mid-year Independence Day Subscription Special. Save 50% or more on your subscription!

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see until December! There isn’t a minute to spare.  Order now.

Renew for as little as $249
for six months,
ONLY $1.38 per day


New Plays

Rebound in Progress

by Jim Brown

Click here to email Jim Brown
Editor's Note

Sears was founded in 1899 and made a 13 year low in May. Shares are rebounding from that low thanks to several new retailing efforts and improving outlook.


SHLD - Sears Holding - Company Profile

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of October 31, 2015, this segment operated approximately 952 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. As of October 31, 2015, this segment operated 735 Sears stores.

I probably did not need that big company description paragraph because everybody knows about Sears. They have fallen on hard times in recent years but they are struggling back. Sears is charging forward with "brand extensions" of its existing brands including Kenmore, Craftsman, DieHard, etc. What is a brand extension? Everybody knows about Kenmore appliances. They have been around for 75 years. But soon you will see Kenmore sinks, facets, and many more items carrying that name. Sears is preparing to market a DieHard line of tires because the DieHard brand is the leading brand for batteries. They are also reducing the store count and selling some real estate. They are also moving to stores within a store. This is where brand name companies rent a certain amount of floor space to sell their products. Sears gets a commission and does not have to order or inventory any products. This reduces overhead and allows for better management of the individual product sections.

Whether it will work or not remains to be seen but it appears they have stopped the bleeding and are now focusing on rebuilding the business.

Shares bottomed at $10 in May and Monday's close at $14.48 was a two-month high. Next resistance is around $18.50.

Earnings are August 18th.

With a trade at $14.65

Buy SHLD shares, currently $14.48, initial stop loss $12.50.


Buy Sept $16 call, currently .88, no stop loss.


No New Bearish Plays

In Play Updates and Reviews

Close but No Cigar

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow tried hard to reach its prior highs with a +137 point gain intraday but lost traction to close 86 points short of the goal of 18,312. The S&P did close in record territory at 2,137 but it was the only index to accomplish that feat. The Nasdaq briefly traded over 5,000 but was not able to hold that level.

The key for the market on Tuesday will be to hold the gains and try to add to them. If we begin to slip backwards the bears could gain confidence and call into question the moves over the last week. There is always a possibility of a double top heading into the Republican convention and the two worst months of the year for the market.

Uncertainty is still rampant and quite a few analysts doubt the rally will last. On the positive side Alcoa beat earnings strongly and Seagate guided higher for their earnings in August. Several other companies have also given positive guidance so there is the potential for an upside earnings surprise.

Current Portfolio

Current Position Changes

DDD - 3D Systems
The long position in DDD was opened at $14.25.

VNET - 21Vianet
The short position in VNET was stopped at $9.88.

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

DDD - 3D Systems - Company Profile


No specific news. Shares stalled at resistance at $14.

Original Trade Description: July 9th.

3D Systems Corporation, provides 3D printing products and services worldwide. The company's 3D printers transform data input generated by 3D design software, CAD software, or other 3D design tools into printed parts using a range of print materials, including plastic, metal, nylon, rubber, wax, and composite materials. It offers various 3D printing technologies, such as stereolithography, selective laser sintering, direct metal printing, multijet printing, colorjet printing, and plasticjet printing. The company also develops, blends, and markets various print materials, such as plastic, nylon, metal, composite, elastomeric, wax, and Class IV bio-compatible materials. It offers its printers under the Accura, DuraForm, LaserForm, CastForm, and VisiJet brand names. In addition, the company provides digital design tools, including software, scanners, and haptic devices, as well as products for product design, mold and die design, 3D scan-to-print, reverse engineering, and production machining and inspection. Further, it offers proprietary software and drivers that provide part preparation, part placement, support placement, build platform management, and print queue management; and 3D virtual reality simulators and simulator modules for medical applications, as well as digitizing scanners for medical and mechanical applications.

The 3D printing sector crashed and burned in 2014 when the expectations for the technology got way ahead of reality. Shares of DDD peaked at $97.28 before starting the long slide to $6 in January 2016. Shares recovered from that low as the sector began to actually provide some amazing technology. Shares rebounded to $19.50 in April before another round of weakness pushed them back to $12. After chopping around in the $12-$14 range they appear ready to breakout.

The new CFO was given a compensation package of $2.1 million a year. He must be really good. If the stock rises to $30 and maintains that level for 90 consecutive days he can exercise options to buy shares at $12.92, which will give him $10.4 million if sold. If the stock prices rises to $40 for 90 days he has another bonus that would give him shares he could sell for a $8.9 million profit. Another bonus awards him $9.4 million if shares reach $30 in year one of his contract and $40 in year two and holds it for 90 days. He has an extreme incentive to get that stock price moving higher.

Hardly a week goes by that 3D does not announce some new process or software enhancement that comes closer to achieving the original expectations for the 3D printing technology. The ability to print parts out of metal has revolutionized the manufacturing environment. Many large corporations are buying printers by the dozens to print parts that previously had to be ordered from the source with long lead times.

Earnings August 3rd.

Shares closed at $14.12 on Friday and that is a two-month high and slightly over resistance. The next resistance level is the April highs at $18.25. If DDD is about to breakout like it did in Feb/Mar then we want to go along for the ride.

Position 7/11/16 with a DDD trade at $14.25

Long DDD shares @ $14.25, see portfolio graphic for stop loss.

No options recommended. Aug $15 call is 74 cents.

EXAS - Exact Sciences - Company Profile


No specific news. Minor gain to another new 9-month closing high.

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. Rumor has it that HPE may considering selling some more assets to slim down even more and increase profitability.

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. Tesla shares were up strongly after Musk tweeted he had a new master plan and would shar eit later this week.

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.

TWTR - Twitter - Company Profile


Twitter was downgraded by SunTrust to a price target of $18, which is currently resistance. Multiple analysts are saying positive things about the new Twitter Live features but they are waiting until earnings on the 26th to change their ratings.

Original Trade Description: July 6th.

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.

Position 7/7/16:

Long TWTR shares @ $17.24, see portfolio graphic for stop loss.

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

BEARISH Play Updates

VNET - 21Vianet Group - Company Profile


There has not been any news since Wednesday but VNET spiked at the open with the market to stop us out of the short position. We still have a long August $9 put that will move to the lottery ticket portfolio because the trend has not changed. One day does not make a new trend.

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:

Closed 7/11/16: Short VNET shares @ $9.57, exit 988, -.31 cent loss.


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

VXX - Ipath VIX Short Term Futues ETN - ETN Profile


The VXX traded under $12 most of the day to a new historic low. We are probably going to be in this position for a long time as it declines to new lows well under $12 this summer. Around $10 and they will do another reverse 1:4 split. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

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.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now