Option Investor

Daily Newsletter, Wednesday, 7/27/2016

Table of Contents

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

Market Wrap

Market On Hold for No Change

by Keene Little

Click here to email Keene Little
It seems like the market's been on hold for the past week until we got through today's FOMC announcement, which included no change to rates and no change to expectations. The market's muted response left indexes still chopping sideways waiting for something to kick it off dead center.

Today's Market Stats

AAPL started things off to the upside this morning, especially for the techs, after it received a positive response to its earnings report after yesterday's close. It gapped up nearly 8$ from about $98 to $104, settling near $104 at today's close. NDX futures (NQ) were up about 40 points before the open, pulled back in the morning and then rallied back up with the rest of the market this afternoon before giving back some into the close. The techs led the way higher today but the blue chips were not able to hold their gains and closed marginally in the red.

The blue chips have been weaker than the techs and small caps for the past week and that could be a bullish sign for the market as money leaves the relative safety of the big blue chips and heads over to the riskier higher-beta stocks. Either that or it's another sign of bullish complacency in the belief the market is heading higher. Usually tops in the market occur with higher highs for the riskier stocks while the blue chips hold back. Is that what we can expect here? It's anyone's guess but it's something to think about as we look for where this market might be heading and when it might be ready for at least a larger pullback.

This morning's economic reports included Durable Goods orders, which were disappointing (not that the market cared). Orders for June were down -4.0% vs. expectations for a drop of only -1.0% and worse than May's -2.8% (revised lower from the previously reported -2.2%). Taking out transportation orders, the number was -0.5% for June, down from -0.4% in May (revised lower from -0.3%) and worse than the +0.2% the market expected. Transportation goods made June's number worse and today the TRAN got smacked down much more than the broader market. I'll review its chart tonight.

This afternoon's FOMC announcement included, to no one's surprise, the Fed leaving the rate alone at 0.375%. In their statement they left few clues about when they're looking at another rate hike. They believe the economy is showing signs of improvement, which hints of another rate hike, but left no clues as to whether it could be in September or as the market believes is more likely, in December. They did say inflation is not showing any signs yet of heating up. The Fed's annual Jackson Hole, WY conference, scheduled for August 26th, could see a few more clues but for now there are just two words to describe today's announcement -- "No Change."

Odds for the next rate hike remained the same at about a 30% chance in September and 48% chance in December. My opinion is they won't be able to raise rates again and instead will be forced by the bond market in the other direction by next year, if not sooner.

Now the market waits for Japan's announcement on Friday about what kind of additional asset purchases they plan to make as they're expected to expand their QE efforts. There's also talk about a perpetual bond after Bernanke's meeting with Japanese leaders earlier in the month. A perpetual bond basically means the central bank will convert all existing government bonds to non-expiring bonds that pay no interest and the effect of that is basically to wipe out the government's debt, wipe their hands clean and start all over again. It would be a new and creative way of declaring bankruptcy without declaring bankruptcy.

The trouble with perpetual bonds is that the central bank will be the sole customer for the bonds. It would be the financial equivalent of the nuclear option since it would be a full admission by both the bank and government that they have debt that will never be repaid and instead will simply be pushed aside into perpetual bonds. Now you see it, now you don't. Genius really, except it would likely completely ruin the ability to sell additional bonds in the open market since future bond holders would be worried the same thing could happen to them again.

None of this had much of an effect on today's stock market but the bond market continued its rally following the decline in the July 21st low. The blue chips have either been chopping lower (the Dow) or sideways (SPX) or higher (techs and RUT). For two weeks we've had a choppy market and depending on the index you will see different possibilities for the next move. There are not many times I am neutral the market but this is one of them, which means trade setups are missing and it's a good time to stay patient and not force trades. I'll start tonight's chart review with the weekly chart of SPX.

S&P 500, SPX, Weekly chart

Last week SPX made a high at 2175.63 and so far this week's high is 2174.98 (this morning's opening spike up) so it's clear SPX is struggling with 2175. There's a price projection at 2177.67, shown on the chart that is within spitting distance and this is where the 2nd leg of a 3-wave move up from February is 62% of the 1st leg up (for a possible a-b-c bounce correction off the February low). Some shorter-term price projections and trend lines show reasons for a lot of resistance between 2175 and 2200 but if the bulls can power through that 25-point zone I see upside potential to 2223. This is level of the 127% extension of the previous decline (May 2015 - February 2016), which is often a target and reversal level. As I'll point out on the 60-min chart further below, this 2223 level shows up again on a smaller pattern. Above 2223, if this turns into a true melt-up and blowoff top, is a projection near 2293 where the rally from February would have two equal legs up.

S&P 500, SPX, Daily chart

A little closer view of the 2177.67 projection is shown on the daily chart and you can see how price has been consolidating just beneath that level. As mentioned above, there are a few price levels between 2175 and 2200 to watch, if reached, and one is a trend line across the highs since June 8th, currently near 2190. This is also a potentially important level that's shown on the 60-min chart below

Key Levels for SPX:
- bullish above 2178
- bearish below 2108

S&P 500, SPX, 60-min chart

SPX has been consolidating sideways since the July 20th high in a contracting triangle, which can be seen on the 60-min chart if you look closely. The post-FOMC spike down did a small throw-under below the bottom of the triangle, near 2161, and then rallied back up to the top of the triangle shortly before the close, near 2172. The pullback into the close kept SPX trapped inside, which keeps both sides guessing but the higher-odds play here is a breakout rather than a breakdown. The rally followed by a sideways consolidation is typically followed by a rally out of it. But, if it breaks down instead it could drop fast (failed patterns tend to fail hard).

Assuming it will rally out of this pattern, once above 2178 it could find resistance at its broken uptrend line from February-May, near 2181 (much higher if viewed with a log price scale), and then a trend line along the highs from July 14-20, near 2188. Above that is a projection at 2191, which is based on the EW pattern projection. It's also coincident with the trend line across the highs since June 8th, mentioned above with the daily chart.

Without trying to get all EW geeky on you, the sideways triangle fits as a 4th wave correction in the leg up from June 27th. That in turn points to the need for one more leg up to complete the 5th wave. Since the 3rd wave of this move is shorter than the 1st wave it's common for the 5th wave to be even shorter and a typical projection (with an extended 1st wave) is where the 3rd through 5th waves equals the 1st wave and that's the 2191 projection. Get it? Got it. Good. The other common projection is where the 5th wave achieves 62% of the 3rd wave, which points to 2221.82 and this matches up with the 2223 extension mentioned with the weekly chart above.

So to recap, I see upside targets/potential resistance levels at 2178, 2191, 2223 and then 2293. A drop below this afternoon's low at 2159 would be possible trouble but with all the choppy price action I'd be reluctant to chase it lower until I see more evidence of a turn down, such as a strong impulsive decline. Bears really need to see SPX below 2135 before they'll have a better shorting signal.

Dow Industrials, INDU, Daily chart

The Dow has been the weaker of the broader indexes I track but it still has left just a choppy pullback that looks more like a bull flag than something more bearish. As long as it holds above its May 2015 high at 18351 it remains bullish. Look for a possible test of that level this week and if it holds it could be a good opportunity to try a long position for another leg up. But I'd keep a short leash on the play and I'd be nervous about holding long positions overnight. The market is overbought and overloved and that's a dangerous combination. However, the flip side is that we have no signals to tell us to get short.

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

Nasdaq Composite index, COMPQ, Daily chart

The first time the Nasdaq made it above its March 2000 high at 5132.52 was April-August 2015 which was followed by another test in December 2015. Today is the third time rallying above this key level and the bulls need to hope it holds above. The bears are salivating about the possibility for a triple top since it's very rare to see a quadruple top. In other words, if the current rally does not hold it's more likely to start a strong decline rather than just a pullback and then test it again. Today's little doji star has the potential to turn into a 3-candle reversal pattern if Thursday finishes with a red candle. But for the bulls, the break above 5132, and holding above, as well as getting back above its broken uptrend line from February-May is a bullish move. They just need to keep it from turning into a failed rally attempt right here. The next upside resistance level is the December 2015 high at 5176.77 (today's high was 5151). As I'll show on the 60-min chart further below, the bulls have a reason to be worried here.

Key Levels for COMPQ:
- bullish above 5177
- bearish below 5075

Nasdaq Composite index, COMPQ, 60-min chart

The Nasdaq's 60-min chart shows a trend line along the highs from June 23rd and that's where today's rally stopped. My best guess on the short-term pattern is that it needs a small pullback and then another push higher, possibly right to the 5176.77 December 2015 high, before it will complete its rally leg from June 27th. As can be seen on the oscillators, the new highs this month have been met with weaker and weaker momentum and this is bearish. The techs have been leading the charge to the upside this month but on weaker momentum and it's a setup for a collapse back down to at least 5000 where we'll have to evaluate it for possibly something more bearish or just a pullback correction.

Russell-2000, RUT, Daily chart

The RUT is another index that has been outperforming to the upside but the alternating up and down days (look at the alternating red and white candles for the past two weeks) as the index chops its way higher is typical of an ending pattern. I've had a 1205-1218 upside target/resistance zone and today it climbed marginally above this zone so that's bullish. But if it doesn't soon breakout into a sprint higher it will continue to look like an ending pattern and if it now drops below the July 20th low near 1198 it would be a good signal the top is in place. In the meantime I see upside potential to at least the trend line along the highs from April-June, currently near 1233.

Key Levels for RUT:
- bullish above 1233
- bearish below 1198

10-year Yield, TNX, Weekly chart

U.S. Treasury prices briefly spiked down on the FOMC announcement but then immediately bounced back up and continued the rally that started off the July 21st low. Yields of course did the opposite and we've seen a pullback in yields in the past week. So far TNX has only retraced 38% of its July 6-21 rally and could easily turn around and head higher in its current bounce off the July 6th low. A reversal of the pullback could see a rally (selling in bonds) to 1.80% for two equal legs up from July 6th. That's also where it would back-test its broken uptrend line from July 2012 - February 2015. Above that level would have me start thinking more bullishly about yields (bearish bond prices) but for now I'm looking at the bounce off the July 6th low as only a bounce correction in the longer-term decline (to at least 1% and maybe down to 0.5%).

KBW Bank index, BKX, Daily chart

Today's rally in the banks popped BKX above resistance at its 200-dma, which it had been consolidating underneath (and above its 50-dma) since July 14th. That has it looking bullish, as long as it holds above its 200-dma, currently at 67.89, for a possible run up to its downtrend line from July-December 2015, near 70 early next week. It takes a drop below price-level S/R near 66.50 to turn BKX bearish.

Transportation Index, TRAN, Weekly chart

The Transports sold off more strongly than other sectors today and TRAN finished down -1.5%, which reversed the bounce from the previous three days. This is happening following the test of downtrend lines from February 2015 - April 2016 and from August 2015 - April 2016, currently near 8000 and 7910, resp. The pullback from the July 14th high can be considered corrective, which points to another rally to follow but so far it remains bearish below 8000. Bulls would be in better shape above the April 20th high at 8149.

U.S. Dollar contract, DX, Weekly chart

The US$ has pulled back slightly from its downtrend line from December 2015, near 97.40, and the pullback is nearing the level (96.65) where it will achieve two equal legs down and so it could turn around and head higher from there. Additional support might be found at its crossing 20- and 200-dmas near 96.60. The dollar has been in a choppy consolidation since its March 2015 high and I suspect it will remain in its trading range the rest of this year.

Gold continuous contract, GC, Weekly chart

Gold has bounced a little this week after pulling back to support at its January 2015 high at 1308 and its 200-week MA, now at 1301.60 (last week's and this week's lows were near 1311. There is still the potential for another push higher to its downtrend line from September 2011 - October 2012, near 1410, and a price projection at 1417.50 for two equal legs up from December 2015. But a drop below 1285 would be a bearish heads up that we're looking for at least a larger pullback before heading higher, or a more bearish move back down to lower lows. Keep in mind that the bounce off the December 2015 low is so far just a 3-wave (a-b-c) bounce correction within a larger downtrend. We do not have any confirmation that a more significant low is in place no matter how much the gold bulls pound the table about why you should move your cash into gold (the usual reason is because the dollar is about to collapse, which I do not see happening until well after 2017).

Oil continuous contract, CL, Daily chart

Oil has continued its pullback from resistance near 51 and is now back-testing its 50-week MA at 41.46 (today's low was 41.68). This could lead to at least a bounce and obviously it would be more bullish above 51 but I think oil will continue lower.

Economic reports

Thursday will be a quiet day for economic reports and then Friday's will include an advance look at GDP, which is expected to improve to 2.6% for Q2 vs. the 1.1% we had for Q1. Also on Friday we'll get the Chicago PMI, which is expected to show a minor decline, and Michigan Sentiment, also expected to decline some.


Depending on which index I look at I could argue for another rally leg or I could argue the rally could top out at any time. The Dow has a choppy pullback, which has it looking like a bull flag and normally another rally leg would be expected. The RUT and tech indexes have been chopping higher, which has it looking like an ending pattern (such as a rising wedge). All have been in choppy patterns but they can't all be interpreted the same way. The techs and small caps have been leading the way higher for the past week but they remain below their all-time highs while the blue chips already achieved new all-time highs. Which index(es) do we believe?

Because of the mixed picture, including in the market internals (day to day they switch from bullish to bearish), one day I feel more bullish the next day I feel more bearish. I feel like my trading should be along the lines of "She loves me, she loves me not, she loves me, she..." Not seeing clear setups for either direction makes trading more like gambling and we're not gamblers (nod your head in agreement). There are good times to trade and there are bad times and this is one of the latter.

It's hard to do but sitting out the times without clear setups is what good traders do. Even if those setups turn out to be wrong there are clear stop levels with them but right now if you make an honest assessment of the charts it's hard to figure out where your stop should be (or it might be uncomfortably far away). Before making a trade the first thing you should be able to answer is where your stop belongs (and then decide if you want it to be on an intraday move or just the closing price).

My sense is that the rally is very close to finishing, within days if not hours. August might not be kind to bulls if this current rally has been primarily based on central bank money in response to the Brexit vote and fears about what's happening in Europe. The big question for us is whether or not we're going to see the usual summer swoon and if so there's a good chance it will start next month. In the meantime, wait for the pretty bus to come along to give you a ride; all ugly busses you can let pass.

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

Penny Stock

by Jim Brown

Click here to email Jim Brown
Editor's Note

Hovnanian was crushed by bad timing ahead of the financial crisis but is finally recovering. This currently an inexpensive stock that costs no more than an option but it will not expire.


HOV - Hovnanian Enterprises - Company Profile

Hovnanian Enterprises, Inc. is a builder of residential homes. The Company designs, constructs, markets and sells single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes in planned residential developments. It markets and builds homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. The Company has two distinct operations: homebuilding and financial services. The Company, excluding unconsolidated joint ventures, is offering homes for sale in 196 communities in 34 markets in 16 states throughout the United States. The Company's financial services operations provide mortgage loans and title services to the customers of its homebuilding operations.

Prior to the financial crisis HOV was an active buyer of land and had extensive holdings when the crash appeared. The decline in home buying and the change in the mortgage business caused them to be very over extended as a result of the crash. Since 2009 they have liquidated a lot of land holdings, built out and sold a lot of properties and have consolidated their efforts and reduced costs significantly.

For Q2 they reported a loss of 6 cents, which was less than half the 13-cent loss in the year ago quarter. Revenues rose 39.6% to $654.7 million. For the first 6-months of the fiscal year revenues rose 34.5% to $1.23 billion. The $7.9 million loss was well below the $25.2 million loss in the year ago quarter. The number of active contracts rose +0.9% to 1,812 homes with the value of the contracts rising 16% to $1.4 billion. The number of contracts in the first six months of fiscal 2016 rose 7.3% to 3,343. The total contract backlog at the end of the quarter was $1.58 billion, up 27.8% from the $1.23 billion at the end of fiscal Q2 2015. As of April 30th, they controlled 34,997 lots.

They paid off $233.5 million in debt over the prior two quarters and ended the period with $125.6 million in liquidity. Since the end of the quarter liquidity has risen $75.1 million due to closings and joint venture funds received. They also paid off another $86.5 million in debt that matured in May.

CEO Ara Hovnanian said, "While our revenue grew 40% and Adjusted EBITDA increased over 220%, as we said last quarter, we remain focused on deleveraging our balance sheet and maximizing our profitability rather than on additional growth. Since October 15, 2015, we have paid off $320 million of debt. More importantly, we continue to believe that we will have the liquidity to pay off the remaining debt maturities through the end of 2017. We are certain that we are taking the correct steps that will best position our company for future success. While it is discouraging to report a loss for the first half of fiscal 2016, it is nevertheless a significantly reduced loss, and we anticipate our profitability in the second half of the year will more than offset this loss."

With the low mortgage rates and the rising number of home sales, I do expect HOV to return to profitability by the end of the year. It has been a long 7 years but they are finally getting rid of the accumulated debt and are riding the wave of new home buyers.

Stocks typically begin to rise about 6-months before widely predicted events. If HOV expects to post profits in Q3/Q4 now is the time to buy the stock. At $1.87 per share I look at it as a LEAP option that does not expire. This is not going to be a rocket stock. This is a buy it and forget it position until year end. Once we are in the position I will track it in the Lottery Play portfolio each weekend. Shares traded at $7 in 2013-2014 and could easily return to that level once they post those profits.

Do not back up the truck on this position just because the stock is cheap. Unexpected events do happen. Just buy a few hundred shares and we will shoot for a return to $6 or a 400% gain.

Buy HOV shares, currently $1.87, no stop loss.


Buy February $2 call, currently 35 cents. No stop loss.


No New Bearish Plays

In Play Updates and Reviews

Mixed Markets

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq rallied strongly on Apple's earnings but the Dow and S&P were negative. Tomorrow the Facebook earnings and $10 spike in aftehours trading should also lift the Nasdaq at the open. After the close Amazon, Google and Baidu report and that could either turn into a Friday rocket ride or an unexpected crash.

The Nasdaq is close to breaking out over the resistance band from 5100-5160 and then threaten a new high. Thursday's earnings will be the make or break event.

Current Portfolio

Current Position Changes

QURE - Uniqure
The short position in QURE shares was opened at $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. Big spike at the open was erased bit still managed a 3-month high close.

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. Minor decline after a 2-month high.

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. 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.

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.

CIEN - Ciena Corporation - Company Profile


No specific news. High intraday volatility but only a minor loss.

Original Trade Description: July 23ed.

Ciena Corporation provides equipment, software, and services that support the transport, switching, aggregation, service delivery, and management of voice, video, and data traffic on communications networks worldwide. The company's Converged Packet Optical segment offers networking solutions optimized for the convergence of coherent optical transport, OTN switching, and packet switching. The company's Optical Transport segment transports voice, video, and data traffic at high transmission speeds. Its Software and Services segment offers network management solutions, including the OneControl Unified Management System, ON-Center Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release, and Planet Operate; Blue Planet software platform; and SDN Multilayer WAN Controller and its related applications. This segment also provides consulting and network design, installation and deployment, maintenance support, and training services. The company sells its products through direct and indirect sales channels to network operators.

On June 3rd Ciena reported adjusted earnings of 34 cents that beat estimates for 27 cents. Revenue rose 3.1% to $640.7 million. Software and services revenue rose 27%, global services rose 3.2% and networking platforms 1.9%. International customers accounted for 43% of revenues. Latin America and Asia Pacific both rose more than 20%. They guided for the current quarter to revenue of $655-$685 million. Analysts were expecting $670 million.

After the earnings, somebody bought 20,000 of the October $23 calls for $1.12 with the stock at $20. On July 16th, there was a rumor of a pending acquisition bid for Ciena but analysts dismissed the rumor rather quickly.

Shares are holding at resistance at $20. The next resistance is $22 and then a potential sprint to $25.50. If the holder of those October calls knows something we do not then an acquisition bid is possible. That is a huge buy since the average daily option volume in all strikes is less than 1,200 contracts. Sometimes hedge funds buy a large quantity of calls when they know they will be buying shares of the stock. When they report their stock purchase it can cause the stock to spike and make the calls profitable.

Earnings are Sept 1st.

I am looking to buy CIEN shares with a trade at $20.35, which would be a five-week high. I am also going to recommend we piggyback on those 20,000 calls and buy the same strike for a long-term hold.

Position 7/25/16 with a CIEN trade at $20.35

Long CIEN shares, see portfolio graphic for stop loss.


Long Oct $23 call @ 70 cents. No stop loss.

CUDA - Barracuda Networks - Company Profile


No specific news. Minor gain but a 10-month high close.

Original Trade Description: July 21st.

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.

FLXN - Flexion Therapeutics - Company Profile


No specific news. Two-month high close. Heading for a retest of resistance at $17.50.

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. Minor decline after the historic high close.

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. Shares declined only 7 cents.

They report earnings after the close on Thursday. We need to stay invested in SCTY in case they announce something related to the acquisition by Tesla. I am recommending we add a ONE DAY put using the weekly options with a $27 strike price. The put closed at 50 cents today. If bad news appears, we can sell the put on Friday. If good news appears the 50 cent loss on the put will not be important.

Buy July Week 5, $27 put, currently 50 cents. No stop loss.

Musk said he had spoken with the largest investors in SolarCity and he expects a "super majority" to support the acquisition.

Shares are already nearing the $28 level and 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


No specific news today. Our long put has more than doubled but not at the rate our TWTR shares are declining. Now that the put is $1.23 in the money the decline should be penny for penny. We do not have any further risk. However, if we close the share position and maintain the put we could profit from any further decline. Once TWTR finds a bottom we can reenter the long position.

Close the long TWTR position. Keep the long put open.

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.


7/25/16: Long Aug $17 put @ 62 cents, no stop loss.

BEARISH Play Updates

QURE - UniQure - Company Profile


No specific news. QURE hit our entry trigger at $7 and the play is active.

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.

Position 7/26/16 with a QURE trade at $7.00

Short QURE shares @ $7.00, see portfolio graphic for stop loss.

No options recommended.

VXX - Ipath VIX Short Term Futues ETN - ETN Profile


The VXX closed at 10.75 and 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 three 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. When a split is announced we will close the position and reenter after the split.

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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