Option Investor

Daily Newsletter, Wednesday, 8/31/2016

Table of Contents

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

Market Wrap

Another Week of Consolidation

by Keene Little

Click here to email Keene Little
Today's trading volume was a little heavier than we've seen recently (not good for the bulls when the indexes finish in the red) but price action continues to be choppy as the market consolidates. We're now waiting for Friday's Payrolls numbers for more clues about what the Fed might do. In the meantime traders are twiddling their thumbs.

Today's Market Stats

The stock market started in the hole this morning after futures pulled back during the overnight session and then a slight drop lower following this morning's pre-market ADP Employment report. The selloff continued into midday but then turned around and bounced back, retracing a good portion of the morning's loss. The day was basically a continuation of the choppy consolidation pattern that we've been in for what feels like the past 10 years (OK I exaggerate; it's only been the past 9 years).

This morning's economic numbers included the ADP Employment report, which came in slightly better than expected (177K vs. 170K) but less than July's 194K (revised up from 179K). It was a neutral number, which keeps the market guessing what the Fed might do with rates in September. Friday's NFP could cause a little more volatility than we saw this morning.

The Chicago PMI for August came in weaker than expected, 51.5 vs. 54.5, and a fairly significant drop from 55.8 in July. This is another sign of our economy in a long slide lower, which is making it more and more difficult for bulls to justify a higher stock market (not that they've needed any justification so far). The market was expecting a smaller decline from 55.8 to 54.5 for August so this might have been a factor in this morning's stock market decline.

Pending home sales for July, at +1.3%, was better than the +0.7% expected and a big improvement over the -0.8% for June (revised lower from the originally reported +0.2%). The health of the housing market, which is holding up so far, will be an important bell weather measurement for how well the consumer is doing. This is especially true as debt levels for consumers rise again and now we're seeing an increase in default rates on many loans, especially auto (the next subprime slime problem for the banks). Many areas of the country, especially major cities, have seen their housing markets back into bubble territory so there's a lot of concern about what will happen when those bubbles burst again, which they will (it's not different this time).

August has been a slow month as far as volume goes and the last figure I saw last week was that it was about 30% below what is normally a slow month anyway. That makes it difficult to tell if the market is consolidating in a bullish pattern or if instead there is simply no power to move this market in either direction. There's been very little effort to move the market and it seems more of an effort to simply hold things in place. Preventing a selloff could be the agenda and if the market can rally instead, all the better.

I'll kick off tonight's chart review with the Dow to highlight some upside potential if the market doesn't crater next week. And if it does neither of those then it will go sideways instead. Now that I've covered all the possibilities I guess there's not much more to review (wink).

Dow Industrials, INDU, Weekly chart

There are a few different ways to interpret the price patterns between indexes and time frames but one bullish idea is shown on the Dow's weekly chart. A not-fun possibility is for September to see price continue to consolidate over/down to the uptrend line from February-June, currently near 17900 and which will be near price-level S/R at 18200 by the end of September. Whether from here or after another month of consolidation, the bullish pattern suggests it will be followed by another rally leg into October before completing a rising wedge pattern off the January/February low. Without trying to sound like I'm from the tinfoil-hat crowd, we know the government can and does support the stock market and we also know those in political and financial power do not like Trump. Most people also know the incumbent party typically loses the election if the stock market declines in October. Do I need to spell out the rest? Unless we're seeing a rolling top pattern develop since mid-July, the sideways consolidation is more bullish than bearish. And the longer it consolidates the more bullish it will become.

Before moving to the Dow's daily chart, I want to show how well the stock market can predict the presidential election, based on its performance in the 3 months leading up to the election. When the stock market is down so is the incumbent party but when the stock market is up there's a greater likelihood the people will keep the incumbent party in power. It's another example of how the stock market is an excellent barometer of social mood. Of the past 22 elections, since 1928, the stock market's performance has accurately predicted the election results 19 times (86%). In the game of odds those are damn good and the incumbent party leaders are well aware of this. The chart below is courtesy InvesTech Research.

Dow Industrials, INDU, Daily chart

The Dow's pullback from August 15th is a choppy move with lots of overlapping highs and lows and this is what gives it the appearance of a corrective pullback. There is a way to view it as a series of 1st and 2nd waves to the downside, which calls for a hard fast break to the downside at any time now. The downside risk from the bearish wave pattern is significant and a drop below its 50-dma, at 18311, would be a bearish heads up. Below the August 2nd low at 18247 would be cause for alarm if you're in long positions. The only way a break below those levels would not be bearish is if we continue to see a choppy sideways/down move in the coming month since that would likely set us up for the October rally. If the combination of the May 2015 high at 18351 and the 50-dma at 18311 continues to hold as support we should see another leg up but what kind of upside pattern we could see is not at all clear yet.

Key Levels for DOW:
- bullish above 18,632
- bearish below 18,247

Dow Industrials, INDU, 60-min chart

The Dow's 60-min chart shows how choppy the pullback from August 15th has been. This has been a tough time for both sides since there have been so many whippy reversals. Again there is a way to interpret the price pattern as a very bearish wave count and the steepening downtrend lines, if not broken quickly, typically leads to a waterfall decline. This could lead to the Dow losing several hundred points in a heartbeat. A rally above 18450 from here would be a bullish heads up and above Monday's high at 18523 would negate the bearish wave count and suggest the next rally leg is underway. At this point in the pattern I'd suggest respect for the downside risk while acknowledging the higher-probability move from here is back up, even if only inside a large consolidation pattern that could last another month.

S&P 500, SPX, Daily chart

Another consolidation idea is shown on the SPX daily chart -- an ascending triangle following the July 20th high. A triangle has 5 waves inside (labeled a-b-c-d-e) and therefore this one requires another up-down sequence before heading higher. This would mean a sideways choppy consolidation for another 2 to 3 weeks before rallying into the end of the month. Needless to say, this would frustrate the hell out of the bears and it would also go counter to the typical September. There's been nothing typical about this year, or years for that matter, and I don't think we can go by what's "typical" for the calendar. The bottom line is that the choppy pattern for August could be a rolling top pattern or a bullish consolidation and we can't know yet which it is. The bears need a break below its 50-dma, now at 2150, and the August 2nd low at 2147 to suggest something more bearish has started (maybe).

Key Levels for SPX:
- bullish above 2194
- bearish below 2147

Nasdaq-100, NDX, Daily chart

The pattern for NDX since gapping up on August 5th looks like a bearish rolling top and a break below 4740, which would also close the August 5th gap, would be a bearish heads up. Below the August 2nd low at 4689 would confirm a more significant high is likely in place. But the short-term pattern for the pullback from the August 15th high can be viewed as a bullish descending wedge with bullish divergence and that suggests it's ready to rally from here (or maybe after one more pullback to 4740 support). As noted on the chart, MACD has pulled back to the zero line from overbought in July-August while price chopped mostly sideways. With MACD "resetting" at the zero line, a turn back up from here would be a bullish setup.

Key Levels for NDX:
- bullish above 4820
- bearish below 4689

Semiconductor index, SOX, Weekly chart

The semiconductor index has been on fire this year and it has helped lift the tech indexes. It's a good thing too since the biotechs flamed out this year. Last year the biotechs (BTK) were up about +11% (after gaining about 50% in both 2013 and 2014) while the SOX was down -3.4%. This year BTK is down -15% while the SOX is up +21%. It looks like hot money rotated out of biotechs into the semis this year. But the SOX has reached a level where caution is warranted. The weekly chart shows it has rallied up to the 127% extension of the previous decline (May-August 2015), at 807.83 with Tuesday morning's high at 808.32 (last week's high was 807.11), which is oftentimes a reversal level. At the same time it is up against the top of a parallel up-channel for the rally from February and the weekly oscillators are looking toppy.

Russell-2000, RUT, Daily chart

The RUT has been the stronger index by chopping its way higher while the others chop sideways or down, including the techs. Today's low was a slight break below its 20-dma, near 1235 (with a low at 1233), but you can see how it's riding up its 20-dma since testing it back on August 2nd. As long as it continues to hold above its 20-dma it stays bullish and for now I see upside potential to the 1270 area by the end of next week. What looks bearish here is the fact that the RUT has been chopping its way higher since July but the oscillators are showing slowing momentum (bearish divergence) and that's a warning sign for bulls.

Key Levels for RUT:
- bullish above 1252
- bearish below 1215

KBW Bank index, BKX, Weekly chart

The banks have not had a good year (down -0.6% at the moment) but they've had a good month of August and are in breakout mode. The weekly chart show the bullish break above its downtrend line from July 2015 and appears headed towards a price projection at 75.41, which is where it would achieve two equal legs up from February. With both the SOX and BKX in gear to the upside it's been good support for the broader market, even if the broader market hasn't exactly been rallying for the past two months. BKX has been in a steep rally and it looks unsustainably steep but keep its upside projection in mind and watch how it behaves if reached.

U.S. Dollar contract, DX, Weekly chart

Last week I had mentioned the US$ had dropped back down to support at the tops of two parallel up-channels (from 2008 and 2011) and that was followed by a bounce back up. It's now just under its 50-week MA, at 96.48 (this morning's high was 96.25) so that's potential resistance (as well as its 200-dma at 96.40). Above that is its downtrend line from December 2015 - January 2016, which is where the July rally stopped. Dollar bulls want to see a break of its downtrend line, currently near 97 and then confirmed with a break above the July high at 97.62.

Gold continuous contract, GC, Weekly chart

Gold's pullback from its July 6th high has brought it close to its uptrend line from December 2015 - May 2016, currently near 1307 and only a point below price-level S/R at 1308 (today's low was 1312). Its pullback is so far a sideways consolidation and two equal legs down points to 1307.4. This makes it important for gold bulls to hold price above 1307 since a drop below that level could usher in stronger selling. It's possible there might be some support at the 200-week MA, at 1291.70, but gold hasn't typically paid much attention to that MA. I continue to see upside potential at least to its downtrend line from September 2011 - October 2012, currently near 1404, but the odds of that happening will lessen if the pullback continues below 1307.

Oil continuous contract, CL, Weekly chart

After oil pulled back from its June high it dropped down to support at its 50-week MA, near 41.46 at the time, and then bounced back up to a downtrend line from June 2014 through the June high. This week's decline adds a little emphasis to the word "rejection" as resistance held. The bounce off the August 3rd low barely got MACD off the zero line and with it turning back down it could drive MACD below zero, which would provide a clue that oil is heading lower. A drop below its 50-wma, now at 41.57, would likely trigger stops on long positions and I can see the potential for a drop back down to at least its January 2000 low at 33.20.

Economic reports

The economic reports have been relatively light this week but we'll see more tomorrow and Friday. Following this morning's ADP employment report, which was only marginally better than the market was expecting, there has been a slight increase in expectations for the NFP report Friday morning, which is 175K, but still lower than the 217K in July. The market would be happiest with a number right around there in order to keep the Fed at bay as far as a rate increase but not showing signs of a fast slowdown in our economy. In reality this employment report is bogus since the real problem is the low-wage job growth vs. the higher-paying jobs. The average weekly earnings continue to decline and that's hurting consumer spending, which of course drives the economy. But expecting the market to care about such details seems in line with expecting my 2-year granddaughter to understand this. Tomorrow morning's important numbers will be Construction Spending and ISM Index, which will be reported at 10:00. Other than that we might see the market go on hold until we get through the NFP report.


August had lower trading volume than past months of August and it seems traders have just stepped aside and don't care anymore. We know money has been pulled from mutual funds and it seems investors are much more aware of how out-of-whack this market is seem to be a little savvier than they're usually given credit for. Some big names are shorting the market in a big way and likely trimmed long positions and raised cash levels. Some will look at large cash levels and see all that buying power. Following a long bull market I'd say it means exactly the opposite.

While I feel bearish about this market generally, I recognize there could be a concerted effort to hold the market up into the elections and I see price patterns that support that idea. If money continues to pour in from overseas and corporations continue to buy back stock (this year is going to set a record for buybacks) it will obviously add buying pressure that's not necessarily related to fundamentals. One could say foreigners have a fundamental problem investing money with negative returns and in stocks that have a weaker economic underpinning so we can't say there's no fundamental argument for a higher stock market.

There are some fundamental reasons for why the stock market could continue to rally but not necessarily from our economic perspective, including weakening corporate earnings and expected higher P/E ratios as earnings decline. But it's a Bizarro World out there and with hyper-active central banks and governments buying up stocks (through ETFs, futures and other vehicles) it has made it much more difficult to judge the stock market by "normal" fundamentals (is there such a thing?).

Follow the charts and right now they're saying the higher-odds play is to the upside. But whether that's from here or after another month of consolidation is hard to say. And while the odds point higher, stay aware of the potential for a very bearish pattern that calls for a waterfall decline (think mini-flash crash) that could start any day now. As we enter September we could get an expansion of the tight Bollinger Bands with a strong bout of volatility. Trade safe and think more about protection than capital gains (in and out quickly, otherwise known as tradus interruptus, while we wait for the larger pattern to become clearer).

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

Partner with Competition

by Jim Brown

Click here to email Jim Brown
Editor's Note

Jack Dorsey's idea of a credit card processor company for the masses took off when he launched Square. Now that he has been successful, the competition is increasing and he is using that to his benefit.


SQ - Square Inc - Company Profile

Square is a mobile payment provider for small businesses, including individuals. Anyone can process a credit card transaction through their Square account using their mobile phone, tablet or laptop computer.

There are at lease 6-8 competitors to Square today. Paypal (PYPL) has offered a card reader for your mobile device for a longtime but they do not advertise it that much. This week Square announced alliances that would let restaurants and retailers to use the point of sale hardware from TouchBistro and Vend. The customers from those two providers will now have access to Squares growing portfolio of services including invoicing, analytics, quick deposits and lending services.

Apparently, Dorsey has discovered that partnering with his competition is the best way to corner the market on his services business.

The company recently announced a similar partnership with Upserve, another startup offering its own point of sale service and software for restaurants. Squares services division saw revenue rise 25% sequentially and +130% over the year ago quarter. Square's lending division is one of the fastest business drivers. They extended 34,000 business loans accounting for $189 million in Q2. That was a 23% increase sequentially and +123% from the year ago quarter.

Q2 revenue of $439 million beat estimates for $406 million. Gross payment value rose 42%. The company reported a loss of 8 cents compared to estimates for a loss of 11 cents. They guided for full year revenue of $1.63-$1.67 billion.

Shares spiked on the earnings news to $11.90 an then faded in a bout of post earnings depression. Recent analyst upgrades provided another boost to $12.50. On Tuesday, Stifel Nicholas upgraded the stock from hold to buy.

The last three days Square shares have been rock solid at $12 despite the market weakness. Once we get past Labor Day, if the market turns positive again, I believe Square will retest its highs at $16.

With a SQ trade at $12.25

Buy SQ shares, initial stop loss $11.65.

Optional: Buy Dec $14 call, currently 45 cents. No stop loss.


No New Bearish Plays

In Play Updates and Reviews

Small Cap Trouble Ahead?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 lost 6 points but closed 6 points off its low. That 50% rebound came as dip buyers bought the low at 1,233 and just over initial support at 1,232. Today's move was nothing to be worried about except that the small caps have been the most bullish index. If they are about to lose traction the broader market could be in trouble.

Investors are positioning themselves ahead of the Friday employment report and the potential for a Fed rate hike. Thursday could be a carbon copy of today we weak holders begin to get nervous.

Current Portfolio

Stop Loss Updates

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

Profit Targets

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

Current Position Changes

ACAT - Arctic Cat
The short position was opened with a trade at $14.15.

CIEN - Ciena
The long position was closed at the open.

AVID - Avid Technology
The long position remains unopened until a trade at $9.85. High today was $9.23.

MRO - Marathon Oil
The long position was closed at the open.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

AVID - Avid Technology - Company Profile


No specific news. Avid said it would release new products at the IBC 2016 conference on Sept 9th.

This position remains unopened until a trade at $9.85.

Original Trade Description: August 27th.

Avid Technology, Inc. develops, markets, sells, and supports software and hardware for digital media content production, management, and distribution worldwide. The company offers professional video creative tools, such as Media Composer product line that is used to edit video content; NewsCutter option and iNews systems for news production; Avid Symphony option, which is used during post-production; Media Composer Cloud solution that enables broadcast news professionals to acquire, access, edit, and finish stories; and Avid Artist DNxIO, a hardware interface for video production. It also offers media management solutions comprising Avid MediaCentral UX Web and mobile-based apps that provide real-time access to media assets for media professional; and Avid Interplay asset management solutions that offer network, storage, and database solutions to enable users to simultaneously share and manage media assets across a project or organization. In addition, the company provides Avid ISIS shared storage systems.

The constant stream of real time content you see on TV is not really real time. The reporter may be live but the constant background videos, the cutaways to apparently live videos and the canned footage of people, places and things, are all put together by video technicians in the production room using various software programs including the Avid products. They can mix, match, edit, cut and produce a stream of video from multiple sources in a matter of minutes thanks to the production software.

Avid has been around a long time. I can remember it being used back in the early 2000s as a cutting edge editing tool. Competition arrived from Adobe, Canopus, Grass Valley and others and it was a fight for market share. Avid never wavered from its quality commitment.

Today their award-winning control software is used by leading sound companies, music studios and post production houses. They have migrated primarily into sound recording and mixing and the products are in high demand. The "Avid Everywhere" platform is the industry's most open, innovative and comprehensive platform for content creation and collaboration.

Quote from Avid. "Media organizations and creative professionals use Avid solutions to create the most listened to, most watched and most loved media in the world, from the most prestigious and award-winning feature films, to the most popular television shows, news programs and televised sporting events, as well as a majority of today’s most celebrated music recordings and live concerts."

In their Q2 earnings report, they said platform licenses for Avid Everywhere were up 47% and cloud-enabled subscriptions were up 390%. More than 38,000 enterprise users were on the platform. There were more than 40,000 paying individual, cloud enabled subscribers, up 62% from Q1 and 390% from Q2-2015. Total bookings rose 32%.

Earnings Nov 3rd.

Shares rose from $7 to $9 on the earnings and traded sideways for the last two weeks. With a positive market, we could see a breakout over $10 and a 52-week high.

With an AVID trade at $9.85

Buy AVID shares, initial stop loss $8.85.

No options recommended because of wide spreads.

CIEN - Ciena Corporation - Company Profile


The long call Lottery Play position was closed at the open ahead of earnings on Thursday morning. CIEN tried multiple times to get over that resistance at $22, which would have turned the call into a big winner but it just could not make the breakout before earnings.

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.

We were stopped out on CIEN on July 28th after INFN posted ugly earnings and warned that demand was falling across the sector. This was mostly company specific to INFN but it did knock CIEN, JNPR and CSCO lower. There was no stop loss on the optional October call so we have retained it as a lottery play that CIEN moves back to the June highs by October expiration.

Position 7/25/16

Closed 8/31/16: Long Oct $23 call @ 70 cents, exit .92, +.22 gain.

Previously closed 7/28/16: Long CIEN shares@ $20.35, exit $18.84, -1.51 loss.

FDC - First Data - Company Profile


Leon Cooperman with Omega Advisors mentioned FDC as a core position on CNBC Wednesday morning and shares rocketed higher. Jefferies initiated coverage with a buy rating and $16.50 price target.

Original Trade Description: August 10th.

First Data provides electronic ecommerce solutions for merchants, financial institutions and card issuers worldwide. The operate in three segments including global business solutions, global financial solutions and network & security solutions. This includes retail point of sale solutions, mobile ecommerce solutions and webstore solutions. They currently process 2,500 financial transactions a second across 118 countries.

First Data was taken private in 2007 for $26 billion by KKR. This debt ended up on the company's books and weighed them down for the last ten years. KKR helped them land a $3.5 billion private placement in 2013. That helped to reduce some of the high interest debt. KKR took them public again in 2015 and raised about $2.8 billion. That was the largest IPO of 2015. The company is still fighting the debt problem with $480 million in interest payments in the first half of 2016. Earlier this year we tried to short FDC because they were strangling under this debt. The situation appears to be improving.

In Q2 they reported adjusted earnings of 35 cents that beat estimates for 34 cents. It also beat the $26 million loss they took in the year ago quarter. Revenue rose 1.9% to $2.93 billion. Revenue in the global financial solutions division rose 12% to $395 million. This is their growth engine. They reduced their net debt by $300 million in the quarter.

Earnings Oct 26th.

Shares spiked from $12 to $13 after earnings and they are about to break over long-term resistance at $13.35. The weakness and volatility from the first six months of 2016 may be coming to an end. If FDC can move over that $13.35 level the next target would be around $16.50.

Position 8/23/16 with a FDC trade at $13.50

Long FDC shares @ $13.50, see portfolio graphic for stop loss.

Optional: Long Oct $14 call @ .50, no stop loss.

HUN - Huntsman Corp - Company Profile


Huntsman pulled back slightly after a 52-week high close on Tuesday.

Original Trade Description: August 23rd.

Huntsman Corporation manufactures and sells differentiated organic and inorganic chemical products worldwide. The company operates in five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. The company's products are used in various applications, including adhesives, aerospace, automotive, construction products, personal care and hygiene, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals, and dye industries. Huntsman Corporation was founded in 1970.

They reported Q2 earnings of 53 cents that beat estimates for 52 cents. Revenue of $2.54 billion matched estimates. They generated more than $350 million in free cash flow and made an early repayment of $100 million in debt. They also announced they were selling some of its European facilities and would use the proceeds to repay debt. They sold a manufacturing facility to Innospec Inc for $225 million and the transaction is expected to close in Q4. Huntsman will remain a raw materials supplier to the facilities once the transaction is completed.

They are also planning to close their titanium dioxide manufacturing (TiO2) facility in South Africa in addition to spinning off their remaining TiO2 business in early 2017. The closure/spinoff will save $200 million.

The earnings, restructuring and debt repayment plans have given the stock a positive bias. Shares broke over resistance on Tuesday to trade at a 52-week high. The next material resistance is $23.

Earnings Oct 26th.

Since the S&P futures are negative tonight I am going to put an upside entry trigger on the recommendation.

With a HUN trade at $17.65

Buy HUN shares, initial stop loss $16.15

Optional: Buy Nov $19 call, currently 60 cents. No initial stop loss.

MRO - Marathon Oil - Company Profile


Oil prices continued to fall and MRO lost -3.4% for the day. We closed the position at the open.

Original Trade Description: August 17th.

Marathon Oil Corporation operates as an energy company. It operates through three segments: North America E&P, International E&P, and Oil Sands Mining. The North America E&P segment develops, explores for, produces, and markets crude oil and condensate, natural gas liquids, and natural gas in North America. The International Exploration and Production segment explores for, produces, and markets crude oil and condensate, natural gas liquids, and natural gas in Equatorial Guinea, Gabon, the Kurdistan Region of Iraq, Libya, and the United Kingdom; and produces and markets products manufactured from natural gas, such as liquefied natural gas and methanol in Equatorial Guinea. The Oil Sands Mining segment mines, extracts and produces oil from Alberta and Canada.

Marathon reported a Q2 loss of 23 cents beating estimates by a penny. Revenue of $1.3 billion beat estimates for $1.19 billion. Q2 production averaged 384,000 Boepd and in line with guidance. U.S. production averaged 189,000 Boepd. They said they were adding extra rigs in Q3 thanks to new inventory of leases in the STACK play Oklahoma. Raymond James upgraded them from outperform to strong buy and Bank of America upgraded them from neutral to buy.

Earnings November 2nd.

Shares are poised to break over resistance at $15.75 as OPEC chats up the headlines about a possible production freeze in late September. The next material resistance is $20.

Position 8/18/16 with a MRO trade at $16.05

Closed 8/31/16: Long MRO shares @ $16.05, exit $15.40, -.65 loss.


Closed 8/31/16: Long Oct $17 call @ 70 cents, exit .35, -.35 loss.

NTCT - NetScout - Company Profile


No specific news. Minor decline after a 7-month high Tuesday in a weak market.

Original Trade Description: August 15th.

NetScout Systems, Inc. provides real-time operational intelligence and performance analytics for service assurance, and cyber security solutions internationally. The company offers nGeniusONE management software that enables customers to predict, preempt, and resolve network and service delivery problems, as well as facilitate the optimization and capacity planning of their network infrastructures; and specialized platforms and analytic modules that enable its customers to analyze and troubleshoot traffic in radio access and Wi-Fi networks. It also provides Intelligent Data Sources under the Infinistream brand name that provide real-time collection and analysis of data from the network. In addition, the company offers portable network analysis and troubleshooting tools to identify key issues that impact network and application performance. Further, it provides security solutions that enable service providers and enterprises to protect their networks against DDoS attacks; and threat detection solutions that enable enterprises to identify and investigate advanced threat campaigns that present tangible risks to the integrity of their networks.

In late July, NetScout reported adjusted earnings of 28 cents that beat estimates for 25 cents. Revenue od $278 million beat estimates for $275 million. They guided for full year earnings of $1.87-$2.12, up from $1.85-$2.10 with revenue of $1.20-$1.25 billion.

NetScout provides their services to the enterprise and service providers. Their products enable network monitoring to maintain continuous uptime and network availability while isolating bottlenecks and intrusions. Their network visibility switches were ranked number one in market share by IHS Network Monitoring.

They posted record attendance at the company's Engage 16 user conference in May. They released version 2.1 of their advanced security solution, Spectrum. They have a new range of products to be released in the coming months that will boost full year revenue for 2017.

Earnings Oct 27th.

Shares spiked on earnings in late July and then experienced the mandatory post earnings depression phase where they consolidated for two-weeks. On Monday they broke over resistance and closed at a 8-month high.

Position 8/19/16 with a NTCT trade at $28.85

Long NTCT shares @ $28.85, see portfolio graphic for stop loss.

No options recommended.

RDN - Radian Group - Company Profile


No specific news. Minor decline today after an 8-month high close on Tuesday.

Original Trade Description: July 30th.

Radian Group Inc. provides mortgage and real estate products and services in the United States. It operates through two segments, Mortgage Insurance, and Mortgage and Real Estate Services. The Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance that protects mortgage lenders from all or a portion of default-related losses on residential mortgage loans made to home buyers, as well as facilitates the sale of these mortgage loans in the secondary mortgage market. It offers primary mortgage insurance coverage on residential first-lien mortgage loans. This segment primarily serves mortgage bankers, mortgage brokers, commercial banks, savings institutions, credit unions, and community banks. The Services segment provides outsourced services, information-based analytics, and specialty consulting services for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities, and other asset-backed securities. This segment offers loan review and due diligence, monitoring of mortgage servicer and loan performance, valuation and component services, real estate owned asset management services, and outsourced mortgage services. Radian Group Inc. was founded in 1977.

With the new credit rules borrowers have to have more money down and a higher credit score to qualify for a home loan. Even then there is sometimes the requirement for credit insurance to allow the loan to be sold in the secondary market. Radian provides the insurance and does the due diligence required to write the insurance profitability. They continue to monitor the mortgage servicers to prevent the loans from going to deep into default by being proactive.

In their recent quarter, they reported earnings of 38 cents that missed estimates for 40 cents. However, shares went up because of the positive guidance. They are writing more insurance on better credits. They wrote insurance on $12.9 billion in loans, a 60% increase from the $8.1 billion in Q1. Of the loans written 57% of the borrowers have FICO scores over 740 compared to 26% in 2007. Only 7% of loans underwritten had loan to value greater than 95% compared to 24% in 2007. Some 86% of insurance in force is on new loans written after 2008. Because of the higher scores and the smaller loan to value on most loans they were able to reduce their loan loss reserves from $1.204 billion to $848 million.

They are paying off debt and redeemed a $325 million note. They had $718 million in liquidity at the end of the quarter. They authorized another $125 million share repurchase and the board authorized the early redemption of $196 million in senior notes due in 2017. In Q2 they also bought back $12.4 million of convertible notes due in 2019.

Earnings Oct 27th.

Despite the minor earnings miss, the company appears to be doing everything right. Shares have risen for two consecutive days after their earnings. Resistance is $13 and they closed at $12.90 on Friday. If they break over that resistance the gains could accelerate.

Position 8/12/16 with a RDN trade at $13.15

Long RDN shares @ $13.15, see portfolio graphic for stop loss.


Long Sept $14 call @ .15, no stop loss.

TWTR - Twitter - Company Profile


Twitter shares spiked after co-founder and board member Ev Williams said the company had to look at all options including a sale. When asked if Twitter can remain an independent company he said, "We are in a strong position right now but as a board member we have to consider the right options." The way he answered the question suggested they were listening to potential offers. He did not say we are not pursuing a sale or nobody has made an offer, or Twitter will continue to be a public company. He left the door open to a future announcement. By phrasing the answer the way he did, he actually invited other companies to make a bid saying we must consider all options.

Original Trade Description: August 29th.

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 implementing the concept with new deals with the NFL, NBA, MLB and NHL. The video shows up in the left side of the screen and the right side has a running commentary of tweets on the topic. 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 rose from the $14 low on June 10th to $21 on August 15th when rumors of a possible acquisition were making headlines. We exited a long play for a nice profit when the shares began to weaken.

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 shares appear to have found support at $18.50 as we move into the football season. With Twitter streaming the Thursday night games they will be attracting a lot of attention. I believe the selling is over and we could see a new move higher on improving fundamentals rather than takeover chatter.

Position 8/30/16

Long TWTR shares @ $18.59, see portfolio graphic for stop loss.

No options recommended because of price.

BEARISH Play Updates

ACAT - Arctic Cat - Company Profile


No specific news. Shares finally broke below support to trigger the entry into the position at $14.15.

Original Trade Description: August 20th.

Arctic Cat Inc. designs, engineers, manufactures, and markets snowmobiles and all-terrain vehicles (ATVs), and recreational off-highway vehicles under the Arctic Cat and MotorFist brand names. The company also provides related parts, garments, and accessories. It offers accessories consisting of bumpers, cabs, luggage racks, lights, snow plows, backrests, windshields, wheels, track systems, and winch kits; shocks, attachments, and float avalanche airbags; and maintenance supplies, such as oil and fuel additives. In addition, the company provides snowmobile garments for adults and children under the Arcticwear brand, which include jackets, coats, pants, and casual sportswear. Its Arcticwear line of clothing also includes insulated outerwear, hats, mittens, helmets, boots, sweatshirts, T-shirts, and casual wear.

For Q2 the company reported a loss of 81 cents that was twice what analysts expected at 40 cents. Revenue of $104.9 million also missed estimates for $118.7 million. The company lowered guidance for the full year to a loss of 70 cents to $1 per share on revenue of $635-$655 million. Shares crashed from $18.25 to $14.33 on the news.

Earnings Oct 28th.

Since the July 29th earnings, analysts have been slashing estimates. Six analysts have cut full year estimates from a consensus loss of 19 cents to a loss of 92 cents. For the current quarter, five analysts have cut estimates from 41 cents to 62 cents.

Shares tried to rebound twice and failed. If the post earnings low fails we could see ACAT move into single digits.

I am recommending we short the stock if it makes a new August low. The current low is $14.33. It could take several days before this position it triggered.

Position 8/31/16 with a ACAT trade at $14.15

Short ACAT shares @ $14.15. See portfolio graphic for stop loss.

FOXA - 21st Century Fox - Company Profile


No specific news.

Original Trade Description: August 23rd.

Twenty-First Century Fox operates as a diversified media and entertainment company in the United States, the United Kingdom, Continental Europe, Asia, Latin America, and internationally. It operates through Cable Network Programming; Television; Filmed Entertainment; and Other, Corporate and Eliminations segments. The company produces and licenses news, sports, movie, and general and factual entertainment programming for distribution primarily through cable television systems, direct broadcast satellite operators, telecommunications companies, and online video distributors. It also broadcasts network programming; and operates 28 broadcast television stations, including 11 duopolies in the United States.

Lately Fox News has been in the headlines after, Gretchen Carlson, a female news anchor, sued Fox and President Roger Ailes for sexual harassment. Within two weeks of the suit being filed, Ailes resigned from the network. In an internal investigation, more than 25 former and current Fox News employees reported incidents. The investigation revealed that a former Fox News staffer, Laurie Luhn, had been given a $3.15 million severance package after she complained about harassment by Ailes who forced her into a sexual relationship through threats and intimidation. Luhn implicated others in the support staff, several of which have moved into management positions with the Ailes departure.

This week Andrea Tantaros, former co-host of The Five and The Outnumbered, filed suit against Ailes and the network claiming the division "operates like a sex-fueled, Playboy Mansion-like cult, steeped in intimidation, indecency and misogyny." She claims other executives under Ailes aided in the cover-up and named names in the suit. She said Ailes actions were "condoned by his most senior lieutenants, who engaged in a concerted effort to silence Tantaros by humiliation and retaliation.

The law firm handling the original Ailes harassment investigation said they anticipate Fox being forced to settle with the women who have filed claims and the numbers of women are in "double digits."

This kind of news is not something Fox wants to report. While the settlements are likely to be in the millions, it is the damage to the brand that is the most important. Fox has been recognized as a pro-family conservative organization and these kinds of continuing headlines will tarnish that image.

Shares have fallen to a 7-month low and are likely to continue falling until after the settlements and the headlines have passed.

Position 8/25/16:

Short FOXA shares @ $24.72, see portfolio graphic for stop loss.


Long Oct $24 put @ .60, no stop loss.

RUBI - Rubicon Project - Company Profile


No specific news. New historic low.

Original Trade Description: August 22nd.

The Rubicon Project is a technology company that engages in automating the buying and selling of advertising. The company offers advertising automation platform that creates and powers a marketplace for buyers and sellers to readily buy and sell advertising at scale. Its advertising automation platform features applications for digital advertising sellers, including Websites, mobile applications, and other digital media properties to sell their advertising inventory; applications and services for buyers comprising advertisers, agencies, agency trading desks, demand side platforms, and ad networks to buy advertising inventory; and a marketplace over which such transactions are executed.

Unfortunately, the arrival of sophisticated ad blocking software has caused RUBI significant pain. The war to claim the space occupied by display advertising has gone nuclear. Facebook reported they had changed their advertising code to get past the largest ad blocker, AdBlock Plus. Only a day later AdBlock reported they had changed their code to counter the change by Facebook. The next day Facebook announced a new change followed by AdBlock announcing a new change, etc. This went on for nearly ten days and we still do not know who will be the winner. AdBlock has more than 200 million users of its blocking program.

For a small company like Rubicon, they are getting trampled by the giants as they race to make their blocking/serving software successful. In their Q2 earnings, RUBI reported 17 cents and $65.1 million in revenue. That beat the street on both numbers. However, they warned that "the digital advertising market is undergoing changes that have fueled headwinds that we expect will continue the remainder of the year in desktop advertising."

They cut guidance for the current quarter from 12 cents and $70.2 million to 8 cents and $62 million. They cut full year guidance to 75-90 cents on revenue of $260-$275 million. That compared to a prior forecast of $275-$290 million. Consensus estimates were looking for 90 cents and $295 million.

Shares crashed from $14 to $9 on the guidance warning. After a minor rebound attempt they are heading lower again and closed at $9.05 on Monday and a historic low.

The outlook is not good for RUBI and their competitors. The ad blocking war is only going to grow more competitive and fewer ads are going to be served and that will impact revenue for quarters to come.

Position 8/24/16 with a RUBI trade at $8.90

Short RUBI shares @ $8.90, see portfolio graphic for 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