Option Investor

Daily Newsletter, Thursday, 7/21/2016

Table of Contents

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

Market Wrap

Some Hesitation Near the Highs

by Keene Little

Click here to email Keene Little
The rally to new all-time highs (for the blue chips) hasn't been on high volume nor has it seen strong follow through and that raises some questions about the breakout (fake-out?). The bulls need to see the consolidation in the past week followed by another push higher to hopefully drag the techs and small caps to follow.

Today's Market Stats

Wednesday's rally looked like it was the start of the next rally leg following the consolidation off the mid-month highs but today's pullback negated most of the rally and now we're left guessing whether the market is ready for at least a larger pullback or if instead the bulls are going to try again from here.

Today's economic reports included unemployment claims data, which were essentially the same as last week's so no big movement there. Existing home sales in June came in marginally better than May but because it's an old report and was basically flat there was no impact on the market. The FHFA Housing Price index for May was marginally lower than April (+0.2% vs. +0.3%, which had been revised higher from +0.2%) but again, old and not much of a change.

Leading Indicators for June showed a turnaround from May's -0.2% to June's +0.3%, which the market expected, but this too is an old report. The one recent report was the Philly Fed index for July, which was a disappointing -2.9 vs. 4.7 for June and not even close to the 5.0 that the market expected. More signs of a slowing economy and that might have had a depressing effect on the market today (although futures were already pointing lower before our day got started).

As we all know, the stock market has ignored signs of economic slowing for a long time. Corporate earnings have been in decline for almost two years and yet the market indexes are pushing to new all-time highs (at least the blue chips are). This has only increased bullish sentiment since most traders now believe the central banks are fully behind a continuing stock market rally because they are very much afraid of a stock market decline. I strongly suspect the bankers have moved away from wanting a higher stock market to stimulate the "wealth effect," to put people into a spending mood, to now wanting to prevent a stock market selloff so as to avoid wealth destruction.

The wealth effect is felt primarily by those who own more stocks as a percentage of their net worth than most everyone else and you can bet they put a lot of political pressure on the Fed to keep things going. Our representatives (and I use that term loosely) tend to get wealthy while in office and they too invest in the stock market so political pressure comes directly from them as well. To say the Fed is not politically motivated is I think somewhat naive, certainly since Paul Volcker back in the 1980s. Our market is clearly motivated by what kind of central banker support it thinks it can expect and the latest rally has been with central bank support out of fear of Brexit and some serious banking concerns, especially in Europe right now but the U.S. is right behind them.

The problem we face, again, is another credit bubble that the Fed has not only encouraged but in fact pushed and the banking system is in far worse shape today than it was back in 2007 before the last market collapse. The banks are heavily exposed to derivatives and have a very low asset/liability ratio, to the point that a 3% decline will wipe out many banks' asset values.

Not helping the banks are the efforts made by central bankers to employ ZIRP and NIRP, which are intended to entice people/businesses/governments to borrow more, which also encourages investors to seek out riskier assets in search of higher yields. When ZIRP wasn't working well enough (as measured by a distinct lack of performance by the economy) the bunch of Keynesian economists thought it simply needed to do more of the same that isn't working. Their theory is that if what they're doing isn't working it's because they're not doing enough of what they're doing and if it is working then they simply need to do more of what they're doing. Heads they win, tails you lose.

NIRP has been the next step by central bankers in Europe and Japan, and now discussed by the Fed, as a way to help "entice" bankers to loan their money instead of holding it. This is now pushing bankers into making the same silly loans that got them into trouble last time. And why not? The banksters made a pile of money off the taxpayer bailouts last time and not one went to jail. Easy money when you can get it. So whether it's the return of subprime mortgages (yes, they're baaaack) or subprime auto loans, all being packaged and sold off in tranches, the same bad behaviors are being fully supported and in fact pushed by central bankers.

While all of this will eventually bite us in that part of the anatomy upon which we sit, all of the money creation from the Fed and banks (lent money is simply created and then it becomes an asset on the banks' balance sheets) goes looking for the highest yields and that's certainly not in bonds. The stock market benefits and it could continue to benefit far longer than we think possible. But again, are we seeing the resumption of the uptrend following the April-June correction or could this be a blow-off top in the making? The answer to that question will be evident later and in the meantime I think we have to be ready for either scenario.

The RUT is showing an interesting setup at the moment and as a good sentiment index I thought it would be good to start with a top-down look at this one first, starting with the weekly chart.

Russell-2000, RUT, Weekly chart

There are a few reasons why 1205-1218 is an important price zone for the RUT and probably why it has been struggling at this level since reaching it on July 12th. On the weekly chart I show price-level S/R near 1215, which starts from the highs in March, July and December 2014 and then acted as support in March-May 2015. The December 2015 high at 1205 is the bottom of the resistance zone and 1217.50 is the 62% projection for the 2nd leg of a 3-wave bounce off the February low. Based on this resistance zone I think the RUT would be more bullish above 1218 and could make a run for 1298 for two equal legs up from February, which would also be a test of its June 2015 high at 1296.

Russell-2000, RUT, Daily chart

The RUT's daily chart shows a sideways consolidation since first reaching the 1205-1218 resistance zone on July 12th. This is bullish until proven otherwise since a consolidation following a trend normally results in the continuation of the trend (up in this case). While it's somewhat bearish with the break of the uptrend line from June 27th, which was broken on Tuesday, it hasn't been followed by a breakdown and therefore still remains potentially bullish. The first sign of trouble for the bulls would be a drop below 1191, which comes from a price projection for the correction pattern since the 12th, a break of which would tell us the pullback is likely more than just a correction. Upside potential is to a trend line along the highs from April-June, near 1228 and it would be more bullish above that level.

Key Levels for RUT:
- bullish above 1230
- bearish below 1191

Russell-2000, RUT, 60-min chart

Between multiple trend lines, price projections and the price pattern it's important for the bulls to power the RUT through it all and keep this rally going. The 60-min chart shows a closer view of the congestion and how today's decline has the RUT dropping out of a parallel up-channel for its rally from June 27th (this after breaking its uptrend line from June 27th on Tuesday) and a point below 1205. If it drops below Wednesday morning's low near 1198 it would give us a bearish heads up but it's possible the leg down from this morning's high is going to complete an a-b-c correction off the July 12th high. A drop below 1191 would suggest it's something more bearish than that and in the meantime it could go either way from here.

S&P 500, SPX, Daily chart

For SPX (and the Dow), there's an uptrend line from February-May that's been in play since it broke in mid-June (and then back-tested until breaking down on June 24th). It rallied back up to the line on July 12th and depending on whether I look at the line using the log or arithmetic price scale you can call it bullish or bearish. Using the log scale it looks like SPX has been struggling to get back above the line. The daily chart below is using the arithmetic scale and it looks bullish as price uses it as support on all small pullbacks, including today's. The intraday chart shows a slight break below the line and then a bounce back up to it at the close and therefore what it does tomorrow will tell us whether or not the line will continue to hold as bullish or instead turn bearish. The other thing I'm watching is the price projection at 2177.67, which is where the 2nd leg of a 3-wave bounce off the February low is 62% of the 1st leg up, for the possible completion of an a-b-c bounce within a larger corrective move down from May 2015. This interpretation says the new all-time high is not bullish but instead is just part of a larger corrective pattern. In other words it could turn into a fake-out instead of a breakout and something to be careful about.

Key Levels for SPX:
- bullish above 2178
- bearish below 2093

Dow Industrials, INDU, Daily chart

Whereas I show the SPX chart above with the arithmetic price scale, the Dow's chart below is using the log price scale. The Dow and SPX look the same relative to their uptrend lines from February-May and notice with the log scale how the uptrend line has been acting more as resistance than support. The Dow (and SPX) have been nuzzling up underneath the trend line (log scale), which has been a common ending pattern in the past. Today's red candle leaves a possible bearish kiss goodbye but a stronger bearish signal would be a drop back below the May 2015 high at 18351. In the meantime the bulls still control the tape.

Key Levels for DOW:
- stay bullish above 18,350
- bearish below 17,900

Nasdaq Composite index, COMPQ, Daily chart

It's looking like the Nasdaq has the March 2000 high, at 5132.52, once again in its sights. This morning's high was about 30 points shy of this level and if it can do better than that we'll probably see the December 2015 high at 5176.77 as the next target. Its all-time high was in July 2015 at 5231.94 so there's a lot of work to be done in order for the Naz (and NDX) to make a new high. So far the new highs have been for the blue chips, which are probably benefitting from a flight to (relative) quality from overseas.

Key Levels for NDX:
- bullish above 5177
- bearish below 4920

10-year Yield, TNX, Weekly chart

For a long time I've been thinking we'll see government bond yields down in the mud before the bull market in bonds completes. With all the talk of negative yields and the fact that the Fed is now considering the same, it's not hard to imagine the 10-year below 1% and the 30-year below 2%. My weekly chart of TNX has consistently show a downside projection to at least 1% and potentially lower (0.50%).

Bill Gross, the bond king, feels bond prices have peaked (yields have bottomed) and last week saw a large bounce back up in yields. His opinion obviously makes me nervous about my projection, especially when I look at the TLT chart, shown further below, but the first thing I'd want to see for TNX, to help confirm something more bearish for bond prices, is a rise above S/R near 1.65%. The next level of resistance would be the downtrend line from November 2015, currently near 1.73%. Above that is its broken uptrend line from July 2012, near 1.81%. So there are a few strong resistance levels to be taken out before the pattern would turn bullish (for yields) but certainly from a bullish perspective the bounce off the July 2012 low at 1.394% must be respected.

20+ Year Treasury ETF, TLT, Weekly chart

The longer-term TLT chart is what has me thinking a little more bearishly about bond prices (in support of Bill Gross's opinion). As can be seen on its weekly chart, squished to show price action since 2007, the July 8th high created a throw-over above a long-term rising wedge following the December 2008 high (with confirming bearish divergence) and a shorter-term rising wedge off the July 2015 low (without confirming bearish divergence). The collapse back down from that throw-over creates a sell signal and since we're looking at the possible completion of rising wedges we could see complete retracements of them in a faster time than it took to build them. The daily chart shows TLT is now oversold and the pattern looks like it should soon be followed by a large bounce correction and that would be a setup to short TLT with a stop at a new high above the July 8th high at 143.62. Assuming we'll get the bigger bounce and then another leg down we'd then have a larger 3-wave pullback in the longer-term bullish pattern or the start of what will become a more bearish 5-wave decline. Figuring that out would have to be done after the 3-wave move down (weeks from now).

KBW Bank index, BKX, Daily chart

Like the broader averages, BKX has been consolidating sideways since first jumping back above its 50-dma on July 14th. Since then it's been chopping between its 200-dma (not quite reaching it, currently at 67.96) and its 50-dma, currently at 67.09. It closed 2 cents above its 50-dma after dropping 4 cents below it this afternoon. As with the others, the sideways consolidation looks bullish and another rally leg would likely see a rally to its downtrend line from July-December 2015, near 70. However, if it breaks down instead it would leave a failed bullish pattern and since failed patterns tend to fail hard, we'd likely see a fast break back below price-level S/R near 66.50.

Transportation Index, TRAN, Weekly chart

The TRAN was relatively weak today (-1.3%) and that has it looking a little more bullish following a test of its downtrend line from August 2015. It had broken its downtrend line from February 2015, currently near 7920, but today it gapped down to it and then sold off some more, leaving a failed breakout into the July 14th high. It is now on a sell signal because of this failed test but it would turn bullish again with a rally above Wednesday's high near 8022, which in turn would be a bullish signal for the broader market as well so keep that level on your alert list.

U.S. Dollar contract, DX, Weekly chart

The dollar climbed back above its 50-week MA at 96.49 and yesterday it bumped into its downtrend line from December-January, currently near 97.40. It looks like it's ready for a pullback but I continue to expect to see the dollar works its way back up to the top of its consolidation range, near 100.

Gold continuous contract, GC, Weekly chart

Gold has not yet reached the upside projection that I thought it could reach, at 1417.50 (for two equal legs up from December 2015), so that remains upside potential if the current pullback gets turned around. Only slightly lower, near 1409, is its downtrend line from September 2011 - October 2012 so there's a relatively narrow target zone to watch if gold rallies a little further. The drop back down below 1347 (the July 2014 high) is a little bearish but so far it's holding its January 2015 high at 1308 (today's low was 1310.70). I think the important thing to keep in mind here is that the bounce off the December 2015 is a 3-wave move and as such it fits as just a correction to its longer-term decline. That could change with a continuation of the current rally but at the moment gold bulls should keep this in mind.

Oil continuous contract, CL, Weekly chart

Oil has pulled back further from its back-test of its broken uptrend line from 1998-2008 and that leaves a more bearish sell signal. But until oil drops back below its 50-week MA, near 41.47, there is still the potential for another rally that will take it above 51, which would be bullish. But for now the larger pattern supports the idea we'll see a drop back down to at least the February low, if not lower (for oil and stocks).

Economic reports

No major economic reports scheduled for Friday.


The stock market has been on a tear to the upside but it hasn't been due to any fundamental changes, which still do not support the current rally. Central bank policies and money supports the market or perhaps more importantly central bank promises support the continued bullish sentiment. But sentiment is a fickle thing and can reverse on a dime. Without fundamental support for the market it is at risk for a disconnect to the downside since we essentially now have a big vacuum underneath the market trying to suck it back down to reality. The one big unknown is how long and how much money will pour in from overseas as it seeks a relatively safer place to park their money. The relative strength in the blue chips reflects this money flow.

The bulls haven't done anything wrong yet and certainly the bears haven't gained any traction to the downside and that leaves things bullish until proven otherwise. Today's decline actually did some short-term damage to the pattern, as small as it was, and if the market continues lower on Friday I'd start to think a little more seriously about the possibility an important high is already in place. We have bullish consolidation patterns from the past week so if they fail we could see a strong spike back down as all the late-to-the-party bulls get stampeded back out of the market and the bears pile back in.

Respect the upside potential while staying wary of the downside risk -- this will remain true for as long as this market continues to push higher.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

New Plays

Fishing for Profits

by Jim Brown

Click here to email Jim Brown
Editor's Note

Barracuda Networks blew away earnings estimates in early July and shares spiked and never looked back. Let's catch a Barracuda and let it pull us higher.


CUDA - Barracuda Networks - Company Profile

Barracuda Networks, Inc. designs and delivers security and data protection solutions. The company offers cloud-enabled solutions that enable customers address security threats, improve network performance, and protect and store their data. It provides various security solutions and Barracuda Web Security Gateway, a solution to protect users from Web-based threats. The company's security solutions also comprise Barracuda NextGen Firewalls to secure the network and optimize traffic flows; Barracuda Web Application Firewall to protect Web applications and websites from data breaches and downtime; and Barracuda Load Balancer ADC to optimize application performance, availability, and security. In addition, it offers data protection solutions, such as Barracuda Backup, Barracuda Message Archiver, and CudaSign, an eSignature platform. The company sells its appliances, services, and software products to education, government, financial services, healthcare, professional services, telecommunications, retail, and manufacturing industries through its sales personnel, distribution partners, and value added resellers in approximately 100 countries.

On July 7th the company reported adjusted earnings of 20 cents that easily beat analysts for 11 cents. Revenue of $86.7 million rose 11% and also beat estimates for $83.8 million. Recurring subscription revenue rose 20% to $65.3 million because of the success in moving to a cloud subscription model rather than appliance sales. Subscription revenue now represents 75% of all revenue. Active subscriptions rose 14% to over 286,000 customers and the renewal rate was 93%.

Earnings Sept 27th.

After the earnings shares spiked to $18.50 from $15. A day later they spiked again to $19.50 as analysts raised their guidance. Shares consolidated for about three days before beginning to trend higher. Thursday's close was a 9-month high with a 1.7% gain in a weak market.

Shares are about to move over resistance at $21.25 from last November with the next major resistance at $30.

With a CUDA trade at $21.45

Buy CUDA shares, initial stop loss $19.25.

No options recommended due to wide spreads.


No New Bearish Plays

In Play Updates and Reviews

Break in the Trend?

by Jim Brown

Click here to email Jim Brown

Editors Note:

Despite the 77-point decline in the Dow, the trend has not yet broken. This could be the start of the decline into the Aug/Sep seasonal weakness but we will not know that for another week. The decline was minimal and there was a decent buying spurt at the close. The 2,160 support level from Tuesday was again support today. The S&P rallied 5 points from that level in the last 30 minutes of trading.

There are dip buyers out there but volume was very light. There is nothing to suggest a market direction for Friday.

Current Portfolio

Current Position Changes

ANF - Abercrombie & Fitch
The long position in ANF was opened at $20.10.

QURE - Uniqure
The short position in QURE shares remains unopened until $7.00.

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

AAOI - Applied Optoelectronics - Company Profile


No specific news. 3-month high close on a minor gain.

Original Trade Description: July 16th.

Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, optical transceivers, lasers, transmitters, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to internet data center operators, CATV and telecommunications equipment manufacturers, and internet service providers through its direct and indirect sales channels worldwide.

This is a small but growing company. The share price has been volatile over the last year with a big drop on Q1 earnings that knocked it down from $16 to $8. They had a problem with lower than anticipated yields on a new 40 Gb light engine and had to redesign it and modify the manufacturing process. That was a onetime event that cost them 30 cents a share in Q1 despite record shipments. They saw a 30% increase in shipments of 100 Gb products.

Immediately after the earnings drop shares began to recover and reached $11.80 last week, which is decent resistance. With expectations for a return to profitability in Q2 I expect the $12 level to be broken and some short covering begin.

Earnings are August 4th. They did not warn for this quarter. We have a short window of about two weeks in this position.

Position 7/18/16 with an AAOI trade at $12.00

Long AAOI shares @ $12, initial stop loss $10.85.

No options recommended because of short duration trade.

ANF - Abercrombie & Fitch - Company Profile


No specific news. The National Retail Federation said back-to-school spending will rise by 11.4% to $75.8 billion this year of which $9.54 billion will be on clothes. Apparel retailers like ANF get about 15% of their annual sales in the back-to-school season.

Original Trade Description: July 20th.

Abercrombie & Fitch Co. operates as a specialty retailer of casual apparel. The company sells knit and woven shirts, graphic T-shirts, fleece, jeans and woven pants, shorts, sweaters, and outerwear; personal care products; and accessories for men, women, and kids under the Abercrombie & Fitch, Abercrombie kids, and Hollister brand names. As of March 2, 2016, it operated through 754 stores in the United States; and 178 stores in Canada, Europe, Asia, and the Middle East. The company sells its products through its stores and direct-to-consumer sales.

Abercrombie has been pounded from the highs at $33 back in March after some disappointing earnings and weak outlook for the retail sector. Since then they have cleaned up their inventory levels and dumped a ton of bad product choices. Now they are heading into their heavy selling season and ready to go head to head with other stores.

The company has been in a restructuring period for over a year where they remodeled stores, dumped inventory and closed unprofitable locations. The drop from $33 to $16 took all the fluff out of the stock price and shares are moving higher today. They closed at a 2-month high on Wednesday.

If the market begins to roll over, these previously oversold stocks will look like a safe haven for investors looking for a bargain. This is Abercrombie's biggest selling season so sentiment should remain positive through Labor Day.

Earnings August 25th.

Position 7/21/16 with a ANF trade at $20.10

Long ANF shares @ $20.10, see portfolio graphic for stop loss.

No options recommended.

FLXN - Flexion Therapeutics - Company Profile


No specific news. Coverage initiated by Lake Street with a buy rating.

Original Trade Description: July 18th.

Flexion Therapeutics, Inc. is a specialty pharmaceutical company that focuses on the development and commercialization of anti-inflammatory and analgesic therapies for the treatment of patients with musculoskeletal conditions. It lead product candidate includes Zilretta, a sustained-release intra-articular steroid, which is in clinical trials to treat the patients with moderate to severe osteoarthritis (OA) pain. The company is also developing FX007, a preclinical, small-molecule TrkA receptor antagonist to address post-operative pain; and FX005, a sustained-release intra-articular p38 MAP kinase inhibitor for patients with end-stage OA pain.

In clinical trials the drug Zilretta reduced knee pain by 50% from the baseline from week 1 through week 12. The FDA said the results were enough to support a filing for U.S. approval. The current treatment is a corticosteriod injection that wears off quickly so Zilretta has a good chance of becoming the treatment of choice for current sufferers. Those over the counter drug patients would also be candidates.

Flexion said they can price the drug at $2,000 a year and that is well within normal insurance guidelines so getting insurance payments should not be a problem. Once Zilretta is in the market place and advertising has begun they expect it to produce more than $1 billion in annual revenue very quickly.

Last week they hired three new executives to prepare marketing plans and advertising so Flexion will be ready to go when the drug is approved. While there is no guarantee the drug will be approved, the FDA rarely suggests the clinical results are sufficient to apply for approval if it is not going to happen.

Recently hedge funds Millennium Management and Renaissance Technologies both bought 125,000 share positions.

Earnings are August 4th.

Shares spiked on May 26th to $17.35 on the news the FDA said they could submit the drug for approval. That excitement faded in June to $13 but shares have returned to a positive trend. If we only saw the shares return to $17.35 that would be a 10% gain but I believe they will pass that level on the potential for the approval of a billion dollar drug.

Position 7/19/16:

Long FLXN shares @ $15.89, see portfolio graphic for stop loss.

No options recommended because spreads are too wide.

HPE - Hewlett Packard Enterprise - Company Profile


No specific news. Shares declined slightly on Intel comments about soft PC sales.

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


Elon Musk released his Master Plan Part 2, which talks about electric busses, trucks and self driving cars but investors were unimpressed. There was a minor sell the news event that weighed on SCTY shares. Musk said he had spoken with the largest investors in SolarCity and he expects a "super majority" to support the acquisition.

I expect Tesla will have to pay more than the $26-$28 it has offered to buy the company. I am still expecting a counter offer in the $30-$32 range.

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.

Update 7/18/16: SCTY raised $345 million in tax equity from four separate partners in June to finance new solar projects. The money will be used to fund new installations. The company also increased its operating line by $110 million by adding two new lenders to the facility. The SCTY capital team has raised more than $1.5 billion in project financing in 2016. They now have more than 30 different banks and corporate partners with financing available 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 announced another set us upgrades to the Periscope application. Shares declined slightly in a weak market.

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

QURE - UniQure - Company Profile


No specific news. QURE has failed to hit our entry trigger at $7.

The position remains unopened until a drop to $7.

Original Trade Description: July 19th.

UniQure is a biopharmaceutical company, engages in the discovery, development, and commercialization of gene therapies in the Netherlands. The company offers Glybera, a gene therapy product for the treatment of patients with lipoprotein lipase deficiency. They have multiple drugs in development for a variety of illnesses.

In their recent earnings they reported a loss of 92 cents that missed estimates for a loss of 82 cents. Revenue of $4.3 million did beat estimates for $2.9 million. This is a very small company and since the ASCO conference their shares have been in crash mode.

Losses appear to be accelerating and they lost $22.69 million in Q1. Their market cap is only $204 million.

Earnings August 25th.

Shares have been declining for the last week and are very close to a new low. We played this back in June when it was making that low and were stopped out for a gain when it rebounded. I think it will set a new low this time and probably sink to $5.

They have only been public for 2 years and from the chart today it looks like they are going significantly lower. Normally when a stock hits the prior historic low there is a rebound or at least a pause.

With a QURE trade at $7.00

Short QURE shares, initial stop loss $8.00.

No options recommended.

VXX - Ipath VIX Short Term Futues ETN - ETN Profile


The VXX closed at 11.45 and 30 cents above the new historic low set on Wednesday at 11.15.

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.

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