Option Investor

Daily Newsletter, Wednesday, 9/7/2016

Table of Contents

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

Market Wrap

Another Dip and Recovery

by Keene Little

Click here to email Keene Little
We have a little more trading volume following the Labor Day weekend with the return of more traders to their desks but it hasn't helped move the market much. Market internals favor the bulls this week so they get the nod but there are enough warning signs to suggest caution about the upside.

Today's Market Stats

Traders are a little more active than we saw in August, thanks to the end of summer vacations, but they haven't been able to move the indexes much. Money is rotating, such as out of biotechs and into semiconductors (although that has switched in the past three days), and small caps have been getting a little boost. But the big-cap blue chips have not been able to break out of their sideways consolidations since July. The tech indexes and RUT look relatively strong but now they're also looking vulnerable to rally completions at any time. It's a tough time to pick a direction to trade.

There was very little in the way of economic reports to move the market today and even the Fed's Beige Book report at 14:00 managed only a small positive reaction but not much in the way of follow through. This morning's little rally was reversed and the indexes dropped into the red. The midday low was then followed by renewed buying, which reversed most of the morning's losses. The end result was a relatively flat day and mixed results across the indexes. The RUT had a relatively strong day and finished up +0.6%. Yesterday was mixed as well but the past two days saw market internals favor the bulls and with opex around the corner we could see some additional support enter the market.

It's not a good time for the bears (yet) but neither is it a good time to even think about being complacent about the upside. With opex next week and then a possible rally into end-of-month/quarter it's not a good time to be thinking aggressively about the short side. But the rally from February is looking tired (bearish divergences) and that suggest caution by the bulls. Both sides have to watch carefully and think hard before entering new trades.

There have been plenty of warning signs about this bull market rally that has extended further than most imagined it would so the chart below is hardly a reason to run out and short the heck out of this market. But it does make you wonder when, if ever, the market will again pay attention to anything other than what the Fed and other central banks are doing.

Typically the stock market "sees" about six months down the road and leads what the economy does. But that has been broken since the Fed became an activist and insists on a stock market rally. Since 2015 the GDP expectations have dropped precipitously from about 2.8% to 1.5% this month. That's not good for corporate earnings and typically the stock market leads this kind of information with a decline but not this time. The stock market has continued to make new highs while GDP drops closer to zero (and soon negative) so there's clearly a disconnect here. That gap between GDP expectations and SPX is an air pocket that will likely get filled and I don't think it will be by GDP growth.

GDP Expectations vs. S&P 500

As far as the current market condition, the price consolidation since mid-July continues to support the bulls since the consolidation is following a rally. The flip side is a rolling top formation, which could lead to a fast breakdown. Since the consolidation is typically bullish, a failed bullish pattern would typically lead to a fast breakdown, which is what usually follows a rolling top. So I point to the bullish pattern as a typical one but continue to stay aware of the potential for a fast breakdown. I'll start tonight's chart review with a look at the SPX weekly pattern.

S&P 500, SPX, Weekly chart

At the moment it's looking like we could see a large rising wedge pattern complete with another leg up in the rally off the February low. But that might mean a choppy pullback/consolidation into mid-October (to meet a cycle low projection) where SPX would hit its uptrend line from February-June near price-level S/R at 2135 (its May 2015 high). From there we could see an end-of-year rally to about 2270-2290 to reach the top of its rising wedge. That's the bullish view for the rest of this year.

The bearish view calls the 3-wave move up from February as just a correction within a larger A-B-C move down from the May 2015 high. The 2223 projection on the chart is where the b-wave (the 3-wave move up from February) would achieve the 127% extension of the a-wave (the 3-wave move down from May 2015 to the February 2016 low), which is typical for this kind of corrective pattern (expanded flat correction). The c-wave would likely achieve 162% of the a-wave, which projects down to about 1670 if it drops from here. It would like be a fast and strong decline, possibly hitting it before the end of the year. It's too early to tell whether the bulls or the bears will come out ahead here but as long as price continues to chop sideways/down it will keep the bullish pattern as the preferred wave count.

S&P 500, SPX, Daily chart

The daily chart shows a sideways triangle idea for the consolidation since mid-July. It's a bullish pattern but only for one more leg up to complete the rising wedge shown on the weekly chart above. The triangle would be potentially complete with one more leg down to the bottom, near 2160 by mid-September, and then a rally into the end of the month, possibly into October. The top of the rising wedge will be near 2230 by the end of September. A drop below 2160 would be a bearish warning sign and below 2147 (the August 2nd low) would negate the triangle pattern and make it look even more bearish. The next support level would be the May 2015 high near 2135 and then the last line of defense for the bulls would be the uptrend line from February-June, which will be near the April high at 2111 by mid-September. How the pattern develops in the next week should provide enough clues for how the rest of the month will likely go. Next week is opex so that could provide a bullish undertone for the market.

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

S&P 500, SPX, 60-min chart

The 60-min chart shows just how choppy and whippy it's been while consolidating sideways. I see upside potential to the top of an ascending triangle (if it's not a sideways triangle as shown on the daily chart above), which is near 2194. It would be a bullish break above that level. Watch for the potential for a turn back down to the bottom of the channel, either from here or from 2194. It wouldn't turn more bearish until it drops below the channel and confirmed with a drop below the September 1st low at 2157.

Dow Industrials, INDU, Daily chart

The Dow's pattern is the same as SPX and currently looks like it could be consolidating in a sideways triangle, which would look complete with one more leg down to the bottom of it, near 18300, before launching the final leg of the rally from February. The upside potential shown on the chart is near 19K by the end of the month. A drop below the August 2nd low at 18247 would negate the bullish triangle pattern, in which case I'd look for a drop to at least its uptrend line from February, which will be near 18090 by the end of next week.

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

Nasdaq-100, NDX, Daily chart

For the 3rd time in as many weeks NDX is trying to get through resistance at its March 2000 high at 4816. The bearish divergence since July is not encouraging for bulls but at least for the short term, yesterday's rally above 4816 was followed by only a small pullback to that level before bouncing back up this afternoon. A 3rd day, tomorrow, closing above 4816 would leave a better confirmation that resistance has been broken. Otherwise this could be a triple top in the making. The problem for bulls though is that there might not be much more upside potential if the trend line along the highs from July-November 2015 stops the rally, which is currently near 4865. It would be more bullish above that level and bearish if it drops below its December 2015 high near 4740.

Key Levels for NDX:
- bullish above 4865
- bearish below 4740

Semiconductor index, SOX, Daily chart

Helping the tech indexes this year has been the semiconductor sector, as many investors have played the idea that self-driving cars and trucks and other innovative products will consume a larger number of computer chips. We've seen a rotation out of the hot biotech sector, where BTK is down about -12% this year, and into the semis, with the SOX being up about +21% this year. But the SOX rally could be coming to an end, at least short term, and that might mean a rotation back into the biotechs (or some other as yet identified tech sector). Last week I showed the SOX weekly chart and how it has pressed up against the top of a parallel up-channel for this year's rally and a price projection near 808. The highs for the past 3 weeks have been near 807, 811 and 809 and the weekly oscillators are curling over from overbought with the decline over the past 3 trading days. The daily chart shows bearish divergence since the July 27th high and the pattern for the leg up from June 27th counts complete. I think a long position in this sector is a risky position.

SOX relative strength to SPX, Monthly chart

Another way to judge sectors is by looking at its relative strength (RS) vs. the broader market. The chart below compares the SOX to SPX and as you can see it has "rallied" above horizontal resistance near 0.35 that has held back the RS of the SOX since 2007. It can certainly go higher, as it did in 1995 (1.01) and March 2000 (0.88) but those relative highs since 2000 continued to decline into 2008 and have been stalled at 0.35 on subsequent rallies in this sector. Are we seeing resurgence in the importance of semiconductor stocks? Again, that's quite possible, but with overbought conditions from monthly, weekly and daily chart and bearish divergence vs. the 2015 lower price high, this is a risky time for the semis. The short-term pattern for August shows a choppy move higher which has it looking like an ending pattern, which means the 3-day decline could be just the start of a larger correction and maybe something more bearish.

Biotechnology index, BTK, Daily chart

If money is getting ready to rotate out of the semis and back into the biotechs we should see a price pattern for BTK that supports that idea, along with the supporting pattern for the SOX that suggests it's ready for at least a pullback, and currently BTK's chart does support the idea that it will head higher. The daily chart of BTK shows a 3-wave pullback from August 1st that achieved two equal legs down and it held support at its 50- and 200-dma's. Yesterday it rallied back above its 20-dma and pushed higher today (SOX down, BTK up) and it's looking like we could see a rally at least up to the top of a parallel up-channel for its rally from February, currently near 3600. But the rally pattern from February looks corrective, which means the entire rally should be retraced and possibly after just one more new high for the bounce pattern. So I wouldn't get excited about this sector other than perhaps a short-term bullish move. Not shown on the daily chart, there is a broken uptrend line from November 2011 - April 2014 that is currently near 3550 when viewed with an arithmetic price scale, which puts it close to the top of the parallel up-channel for the bounce off the February low. That broken uptrend line is where the rally stopped on August 1st.

Russell-2000, RUT, Daily chart

The RUT had a pretty good day today, up +0.60% while the other indexes were basically flat. It is now again approaching the trend line along the highs since July 12th, currently near 1268. This line has repeatedly stopped rallies since July and with the bearish divergence since then it's hard to believe the current rally will have any better luck. A longer-term trend line along the highs since April-July is now only slightly higher, near 1270, so there's double resistance at 1268-1270. The choppy rally since August 3rd looks like an ending pattern and we could be near the final high for the rally from June. It would be more bullish above 1272 but at the moment I think that's a low-probability event (but we're only talking about probabilities).

Key Levels for RUT:
- bullish above 1272
- bearish below 1215

30-year Yield, TYX, Daily chart

Bonds have barely moved since July 21st when yields peaked following the July 8th lows (highs for bond prices). As can be seen on the chart of the 30-year yield, the consolidation off the July 21st high has created a sideways triangle and the tight coil should be ready to break soon. The typical move from here should be up (prices down) and another equal leg up from here targets 2.463%. It might make it up to resistance near 2.5% but once the 3-wave bounce off the July 8th low completes (assuming we'll get the 3-wave bounce pattern) it should then lead to another decline. It's possible it will simply collapse from here and a drop below the July 29th low at 2.18% would negate the short-term bullish triangle.

Transportation Index, TRAN, Daily chart

The transports got a good boost today and as you can see on its daily chart, it looks like a clean break of its downtrend line from August-November 2015. The upside target is the April high near 8150 and the 62% retracement of its November 2014 - January 2016 decline, near 8200. The only thing the bulls need here is for the oscillators to catch up since MACD is showing a significant bearish divergence against its July high.

U.S. Dollar contract, DX, Weekly chart

The US$ is struggling to get through its 50-week MA at 96.45 and last week's high was 96.25. It should proceed higher but the choppy price pattern makes it difficult to figure out the short-term pattern. Not much to say about it as long as it stays trapped inside its 92-100 trading range.

Gold continuous contract, GC, Weekly chart

The short-term pattern for gold continues to support the idea for another high and its downtrend line from September 2011 - October 2012, near 1400, and a price projection at 1417.50 remain good upside targets. Gold would be more bullish above 14718 but at this time I'm not expecting it to rally higher. A drop below the September 1st low at 1305.50 would signal the start of a larger pullback/decline sooner rather than later.

Oil continuous contract, CL, Weekly chart

Short term it's looking like oil could get another leg up to create a larger bounce pattern off its September 1st low. Two equal legs up points to 47.37 but it might find trouble at its downtrend line from June 2014 - June 2016, currently near 47. It poked above this downtrend line on August 18-19 but then dropped back down, leaving a failed breakout attempt. Obviously it would be more bullish if it can break the downtrend line and stay above it for at least 3 days. If that happens we can then look for another test of price-level resistance near 51 to see if oil really can break out to the upside. Otherwise the larger pattern supports the idea for lower lows in the coming year.

Economic reports

There's not much in the way of economic reports for the rest of the week to move the market. We should instead see the influence of opex week start to more of an effect.


The RUT is chopping its way higher, which looks like an ending pattern, and the tech indexes look like they could soon put in the final touches to their rallies. In the meantime the blue chips look like they could consolidate for another week or two before pressing higher into the end of the month so we have enough differences to suggest caution by both sides. Either the blue chips will end up dragging the techs and small caps higher or the sideways consolidation patterns for the blue chips are instead rolling tops, in which case we can expect a fast breakdown and it could start at any time.

At this time, unless the blue chips look to be holding their bullish continuation patterns, I don't feel confident enough about the upside vs. the downside risk. But if the consolidation patterns continue through next week I'll start to feel a little more bullish about the idea for an end-of-month/quarter rally to get the funds their closing highs (as they chase performance). We might see money rotate into the safety of the big caps, which is why we could see the blue chips drag the other indexes higher but with weaker relative strength.

The choppy pattern leaves us guessing what could follow and it's a risky time for both sides to trade. There are good times to trade and not so good times and I think this is the latter. Stay safe and wait for a good pitch before taking a swing.

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

Recovery in Progress

by Jim Brown

Click here to email Jim Brown
Editor's Note

It is tough to play any oil related equity but some have shaken off the volatility and are moving to six-month highs. Unit Corp is more of a natural gas play and has developed some loyal followers.


UNT - Unit Corp - Company Profile

Unit Corporation, operates as an oil and natural gas contract drilling company primarily in the United States. The company operates through three segments: Oil and Natural Gas, Contract Drilling, and Mid-Stream. The Oil and Natural Gas segment acquires, explores, develops, and produces oil and natural gas properties primarily located in Oklahoma and Texas, as well as in Arkansas, Colorado, Kansas, Louisiana, Mississippi, Montana, New Mexico, North Dakota, and Wyoming. As of December 31, 2015, this segment had approximately 65 gross proved undeveloped wells. The Contract Drilling segment is involved in the contract drilling of onshore oil and natural gas wells for its own account, as well as for a range of other oil and natural gas companies primarily in Oklahoma, Texas, Wyoming, and North Dakota, as well as in Louisiana and Kansas. As of December 31, 2015, this segment had 26 operating rigs. The Mid-Stream segment buys, sells, gathers, transports, processes, and treats natural gas for third parties and for its own account. This segment operates 3 natural gas treatment plants, 13 processing plants, and 25 gathering systems, as well as approximately 1,464 miles of pipeline. Unit Corporation was founded in 1963. Company description from FinViz.com.

For Q2 the company reported an adjusted loss of 15 cents compared to estimates for a loss of 22 cents. Revenue was $138.3 million. They recorded record production of 97 million cubic feet per day from the Wilcox play, a 25% increase year over year and a 9% increase from Q1. Seven of eight of their highly features BOSS rigs were currently operating under contract to other producers compared to six in Q1. The Midstream segment volumes rose 15%.

Earnings Nov 3rd.

Since oil and gas prices have declined they have reduced drilling of new wells and used their rigs to recomplete existing wells to boost production. An example of the production increase came from four Wilcox wells that were producing 700 Mcfe per day before the recompletion and 17,000 Mcfe after the work over. They anticipate putting additional rigs to work on new wells in early 2017.

Unit has been using the weakness in oil prices to reduce costs and streamline operations rather than try to continue drilling new wells during glut conditions. They are poised to increase production on demand because they own their own fleet of rigs and are not paying high lease fees for drilling equipment.

Oil prices are in rally mode this week because of a unique agreement announced on Monday where Russia and Saudi Arabia will form a joint venture to stabilize oil prices among OPEC and non-OPEC producers. It remains to be seen if it will ever happen but prices are rising on the expectations.

Unit has been relatively calm during the ups and downs in oil prices in 2016 and are poised to break out to a new high for the year.

Buy UNT shares, currently $18.08, initial stop loss $16.50.

No options recommended because of price.


No New Bearish Plays

In Play Updates and Reviews

New Small Cap Highs

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P-400 and 600 both made new highs while the big caps were negative. In theory, it was a good day for small caps stocks with most of them positive but the individual gains were minimal. The big caps were lackluster again and the Dow and S&P-500 continue to be stuck in their recent consolidation range.

Facebook was the only one of the FANG stocks to post a gain after the monster moves on Tuesday. The post Labor Day rally faded and the major indexes had trouble moving over the flat line. I saw several instances of single stocks posting large declines on no news. These were stocks with weeks of gains and they suddenly fell hard. This appears to be portfolio managers locking in gains to raise money to shop for new positions. We knew this was going to happen in September. This is what causes the high volatility. We are just getting started and September has a lot of sessions left. With option expiration only 7 sessions away we should see some heightened volatility over the next 4 days as managers close their option positions.

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

VXX - Volatility ETF
The short position was entered with a trade at $33.88.

SQ - Square Inc
The long position remains unopened until a trade at $12.25. High today was $11.97.

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

CC - Chemours Co - Company Profile


No specific news.

Original Trade Description: September 3rd.

The Chemours Company provides performance chemicals in North America, the Asia Pacific, Europe, the Middle East, Africa, and Latin America. It operates in three segments: Titanium Technologies, Fluoroproducts, and Chemical Solutions. The Titanium Technologies segment produces and sells titanium dioxide (TiO2) under the Ti-Pure brand name to deliver whiteness, brightness, opacity, and protection in various applications, such as architectural and industrial coatings, flexible and rigid plastic packaging, PVC window profiles, laminate papers, coated paper, and coated paperboard used for packaging. The Fluoroproducts segment provides fluoroproducts, such as hydrofluorocarbon refrigerants, and fluoropolymer resins and downstream products and coatings under the Teflon brand name. The Chemical Solutions segment offers industrial and specialty chemicals used in gold production, oil refining, agriculture, industrial polymers, and other industries in North America. This segment provides cyanides; and performance chemicals and intermediates, such as clean and disinfect chemicals, aniline, methylamines, glycolic acid, Vazo free radical initiators, and reactive metals. Company description from FinViz.com.

This company has had a hard life since going public. Back in June Citron Research released a report critical of Chemours saying it was a "zero" because of lingering liabilities they inherited when DuPont spun them off. According to Citron they had liabilities for the manufacture of PFOA while it was part of DuPont. Citron said the company was "designed for bankruptcy" to rid DuPont of those lingering liabilities. Chemours issued a strong rebuttal. Bloomberg researched the background and said Chemours might have $800 million to $1.5 billion in risk. Anyone suing for contamination has to sue DuPont first and they have deep pockets. Chemours agreed to share some of the risk in the event of a judgment. In any event, it will be years before there is any real liability to Chemours.

Shares collapsed but at the same time David Einhorn raised his stake from 5.44 million shares to 8.44 million. If Einhorn is not worried, we should not be worried for a 30-45 day trade. We will exit before earnings. Argus upgraded them to a buy saying they had a significant competitive advantage becaus of their size, vertically integrated structure and rapid cost cutting.

Earnings Nov 3rd.

When they reported for Q2 they earned 27 cents compared to estimates for 17 cents. Revenue was $1.38 billion and missed estimates for $1.42 billion because of the sale of a division. The company said it was delivering $350 million in cost reductions and add $150 million in adjusted EBITDA through 2017. The prior quarter they earned 6 cents compared to estimates for a penny. They have history for strongly beating estimates.

They announced the sale of their sulfur business for $325 million and the sale of the Clean and Disinfect business for $230 million. The company is shedding noncore assets to improve profitability.

Zachs said analysts they follow are raising estimates but they still believe Chemours will post another beat. Based on Sach's proprietary indicators companies with the Chemours profile beat 70% of the time. Over the prior week the 2016 consensus estimate rose from 63 cents to 77 cents. For 2017 the estimates rose from $1.10 to $1.27, which is 64% over 2015 levels.

A week ago, a large investor sold 2,000 October $10 calls for $2.90 and reinvested the gain into 4,200 January $15 calls for $1.

Position 9/6/16 with a CC trade at $13.75

Long CC shares @ $13.75, see portfolio graphic for stop loss.

No options recommended because of price. The Oct $15 is 65 cents but time is short. The next available series is January and very expensive.

FDC - First Data - Company Profile


No specific news. Closed at 7-month high.

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


No specific news. Minor decline.

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.

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.

NTCT - NetScout - Company Profile


No specific news. NetScout will participate in an investor conference on Thursday with a presentation at 9:40 ET.

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. New 8-month high close on Friday. Shares have now reached resistance at $14 and we could see some weakness over the next several days.

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.

SQ - Square Inc - Company Profile


No specific news. Minor decline in a mixed market.

This position remains unopened until a trade at $12.25.

Original Trade Description: August 31st.

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.

TWTR - Twitter - Company Profile


Multiple articles again today on a possible sale of Twitter. The board meets on Thursday and investors are running out of patience. They are reportedly worried about a group of activist investors swooping in and making life miserable for the company.

Today's rumored suitors include Google, Facebook, Amazon and Verizon.

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.

Update 8/31/16: Twitter shares spiked on Wednesday 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.

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. Still chopping around the $14 level with the trend still negative.

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. Just waiting for the next headline to appear.

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.

Update 9/2/16: New headlines show that Roger Ailes had sexual harassment problems in two jobs before the FOX job. He harassed women into having sex, secretly filmed the events and then warned them later he would release the videos if they ever went public with the harassment. Nineteen women have come forward from prior jobs in addition to the 23 women from Fox.

Update 9/6/16: Fox announced it had settled with anchor Gretchen Carlson over the sexual harassment suit against Roger Ailes. The reported amount was $20 million. News over the weekend reported Carlson had taped conversations with Ailes in his office where he continually propositioned her and said it would be good for her career. Fox is still negotiating with 23 other women that had complained about unwanted advances by Ailes.

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.

VXX - Volatility Index Futures - ETF Description


Another day, another decline. Since this is a long-term play I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong Q4 rally.

Original Trade Description: September 6th.

The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.

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