Option Investor

Daily Newsletter, Wednesday, 10/5/2016

Table of Contents

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

Market Wrap

Sideways Consolidation Continues

by Keene Little

Click here to email Keene Little
The stock market has been stuck in neutral since July-August and the trading range is narrowing. Some indexes show a coiling in a sideways triangle pattern, which says we're going to get a strong move soon. The challenge for traders is figuring out which way it is likely to break and then get in front of the move.

Today's Market Stats

The market is chopping up and down while it goes nowhere and the consolidation range is tightening. Some indexes, such as the Dow, are forming clear sideways triangle patterns while other indexes are simply consolidating sideways and/or chopping their way marginally higher. Which way it will break is arguable and as traders we simply need to let the market tell us which way to trade. At the moment the market is giving us a blank stare.

There's very little to add to the discussion about the market since very little has changed. The market is ignoring economic reports (which it's been doing for a long time) as it focuses solely on one thing -- what's the Fed going to do. It's enough to drive me crazy since I believe the Fed is worthless and causes much more harm than good. But my opinion doesn't drive the market and therefore I and everyone else is forced to figure what the market THINKS the Fed might do and then what the market THINKS might happen based on what the Fed actually does. Good luck trying to figure all that out. So I'm just going to jump right into the charts, starting with the Dow's weekly chart. It's about the only thing most of us can at least watch for where price is telling us what the market is likely headed next.

Dow Industrials, INDU, Weekly chart

The Dow continues to provide one of the clearer pictures on the weekly chart as far as maintaining the bullish potential for another leg up to complete a rising wedge pattern off the February low. From here it would be the 5th and final wave to complete the 2009-2016(7?) bull market. The upside potential that I'm depicting on the chart is to about 19250 in November. That would also have the Dow achieving its 127% extension of its previous decline (May-August 2015), at 19162, which is a common target/reversal level.

This is obviously just a guess but so far the bulls haven't done anything wrong and the bears haven't done anything right, which keeps the bullish pattern alive. I hesitate to say "bullish" pattern since the rising wedge is actually a bearish pattern and quite bearish -- if it completes as depicted we will then see a complete retracement of the entire wedge faster than it took to build it. That would mean back down to the February low near 15500 in just a few months. For the short term the bulls simply need to prevent the bears from pulling the Dow below the September low at 17992 since that would open up more immediate bearish possibilities.

Dow Industrials, INDU, Daily chart

The Dow has been consolidating since its August high and September low and it has formed a sideways triangle. From a bullish perspective the consolidation follows the August high and a break above the top of the triangle, as well as its coinciding 50-dma, both near 18380, would be a bullish heads up. Above its September 22nd high at 18450 would be a confirmed breakout. But from a bearish perspective, considering the consolidation follows the September low, it's a setup for a strong move down once the triangle pattern completes (perhaps with one more tag of the top of the triangle and another back-test of its broken 50-dma). Another leg down equal to the August-September decline would be expected, which would target the 200-dma, currently near 17620. A breakdown below 17992 would indicate the consolidation pattern completed and the next leg down will have begun.

Key Levels for DOW:
- bullish above 18,450
- bearish below 17,992

Dow Industrials, INDU, 60-min chart

The Dow's 60-min chart shows the amount of choppy and whippy price action since the September low and this is a strong indication of a consolidation pattern, especially common in a triangle. The bearish interpretation says today's bounce, which could extend into Thursday, will lead to a breakdown. The bullish interpretation says the rally off Tuesday's low will lead to a strong rally that will take us to new highs. A pullback and then a breakout above 18351 would be a stronger indication that the bulls maintain control. But we could first see another pullback in the triangle to keep both sides guessing which way it's going to break. Playing this conservatively means waiting for the breakout/breakdown since there should be plenty to play in the move that follows.

S&P 500, SPX, Daily chart

Like the Dow, SPX remains trapped inside a narrowing trading range since its August high. The consolidation can be considered both bullish and bearish, depending on where you view the starting point of the consolidation, and that means waiting for a breakout above 2188 or breakdown below 2119 before knowing which way to trade this. If it breaks out we should see a rally for the rest of October with an upside target around 2250. If it breaks down we should see it head for its 200-dma, currently near 2066. Mind the chop between about 2140 (the uptrend line from February-June) and 2183 (the downtrend line from August-September). At the moment MACD has not been able to climb much above zero and that could be a sign of weakness as a rolling top continues to play out. Keep in mind that even a breakout or breakdown could be simply part of a larger corrective pattern, which could get reversed just as quickly as we've seen the constant small reversals in this consolidation pattern. These are tough patterns for traders since the whipsaw moves can cause death by a thousand cuts.

Key Levels for SPX:
- bullish above 2188
- bearish below 2119

Nasdaq-100, NDX, Daily chart

Since September 15th NDX has been battling between support at its March 2000 high at 4816 and resistance at its trend line along the highs from July-November 2015. It hasn't made much progress above 4816 since first hitting this level on August 15th but other than the snap to the downside on September 9th and then a quick recovery it hasn't shown any signs of a breakdown either. For the past 10 trading days it has been struggling to get above its trend line along the highs and today it climbed above it (again) but only managed to close on the line (again), near 4877. I show an upside target at 4930, which is a price projection for a 5th wave in the rally from June, where it would equal the 1st wave. This is not a clean pattern, nor is the leg up from September 12th, so it's not a high-confidence target/resistance level but one that will be important to watch if reached. Currently near 4920 is a shorter-term trend line along the highs from August-September and with the bearish divergences since August it's important for bulls not to be complacent here.

Key Levels for NDX:
- bullish above 4931
- bearish below 4811

Russell-2000, RUT, Daily chart

The RUT has held support at its 20-dma for the previous 7 trading days and yesterday it also held coinciding support at its uptrend line from June-September. The choppy consolidation following its September 22nd high looks like a bullish continuation pattern and that means as long as the uptrend line from June, currently near 1243, continues to hold it keeps the RUT bullish. The upside projection at 1294, for two equal legs up from September 13th, crosses the top of the rising wedge (trend line along the highs since April) mid-month during opex week. The bears need to see the RUT below 1215 to negate the bullish pattern.

Key Levels for RUT:
- bullish above 1264
- bearish below 1215

20+ Year Treasury ETF, TLT, Daily chart

Treasuries sold off sharply in the past week, driving yields higher with speculation of a Fed rate increase, and TLT is threatening to break down. Today it dropped through price-level support at its February 2016 high at 135.25 and it could be headed at least back down to the bottom of its parallel down-channel from its July 8th high. The bottom of the channel is currently near its September 15th low at 133.03 and it could coincide with the 200-dma that's rising up toward that level, perhaps by Friday. That means 133 should be strong support for at least a bounce but obviously bearish if it breaks. The strong pullback from September 28th now makes the larger pattern suspect but until proven otherwise (starting with a decline below 133) I continue to believe we'll see bond prices rally as it becomes clearer that the Fed will not be in any position to raise rates. They talk a good game but they back down each time they have a chance to raise rates and this has been going on for years.

Transportation Index, TRAN, Weekly chart

The transportation stocks have been doing well and TRAN is pulling ahead of the Dow to the upside. There are no new highs coming for the TRAN even if it continues its rally for a few more weeks. I doubt it has a chance to best its November 2014 high at 9310, and that continues to leave a bearish non-confirmation with the Dow but for now it's looking potentially bullish for a continuation of its bounce. I show a price projection at 8775 for two equal legs up from January but there is of course no guarantee it will get there (or stop there for that matter). The bearish divergence as it tests its April high at 8149 (today's intraday high was 8145) has the potential to leave a double top if the bulls can't keep it up.

U.S. Dollar contract, DX, Daily chart

The US$ has been chopping around just as much as the stock market and it's still not clear if we're going to see a drop lower or a continuation higher. The bounce off its August 18th low looks like a small rising wedge pattern and as such it's pointing to a breakdown, potentially back to the bottom of its shallow down-channel from March 2015, which is near the price projection at 92.82 for two equal legs down from July 25th (if it starts down from here). A break of its downtrend line from December 2015, currently near 96.60, would have it looking more bullish but it could continue its choppy and whippy ways as it works its way back up to the top of its consolidation pattern that it's been in since the March 2015 high.

Gold continuous contract, GC, Daily chart

Gold has broken down and it broke down from a bullish pattern (the descending triangle, which fit as a bullish continuation pattern). Since failed patterns tend to fail hard we could see gold hit support at 1182-1199, which includes price-level S/R that goes back several years and the May 31st low at 1199 before we'll see a sizeable bounce/rally. If the bearish wave pattern is correct, the 3-wave bounce off the December 2015 low into the July 2016 high will now be followed by the resumption of selling that will take gold below 1000. It's too early to tell which will happen but I know there are a lot of gold bugs out there and if you're buying for a rainy day then lower prices are simply good times to accumulate more. But if you're a gold trader, now's a good time to be much more cautious about the bullish side and instead think protection.

Silver continuous contract, SI, Weekly chart

Silver's weekly chart shows the same breakdown this week but it is now testing its uptrend line from December 2015 and could get a bounce/rally from here. If the metals are pulling back on fears of the Fed raising rates (and thereby increasing the value of the dollar), it could all suddenly reverse if the mood changes and traders start believing the Fed has no wiggle room to raise rates. Now's the time for silver to bounce if it's going to do so. Any lower than 16.91, where its pullback from July 5th would achieve two equal legs down, would be more bearish.

Oil continuous contract, CL, Daily chart

Oil has had a nice little rally off its September 20th low and with today's high at 49.97 it's now nearing price-level resistance at its October 2015 high at 50.92 and then its June 9th high at 51.67. Two equal legs up from its August low points to 51.97 to complete a possible a-b-c bounce correction. Based on this 1-point resistance band at 50.92-51.97 oil would be much more bullish above 52. But short term there could be trouble for oil since the leg up from September 27th has formed a rising wedge and today it did a little throw-over above the top of it, which was then followed by a drop back inside the wedge, thus creating a sell signal. A rally above 50 would negate the sell signal so it will be important to see what happens tomorrow.

Economic reports

Today's economic reports were basically ignored and tomorrow's lack of reports means the market will react to whatever is going on overseas. Friday morning's reports will move the market since they're Payroll related and there will be much handwringing and gnashing of teeth as traders try to figure out how the Fed will react to the numbers. It doesn't matter one wit what the numbers are, only the market's reaction.


For traders the long choppy consolidation patterns we've seen this year are enough to bring us to tears and that's after we pull the hair out of our heads. The latest consolidation pattern, especially visible on the Dow, shows we're getting ready for a big move but it's not clear yet which way the move will be. If we get a breakout to the upside it's important to recognize the sideways triangle as the pointer to a final leg, which could certainly run for a little while (mid-October at least and potentially into mid-November), but it will likely turn into a giant bull trap. Trade it but don't own it.

If the market breaks down out of the consolidation patterns it would likely lead to a fast decline but not a crash leg of any kind. Another leg down equal to the one from August would be my expectation and then get ready for another bounce. Whether that bounce would lead to higher highs or just a bounce correction before heading lower again will have to be figured out in real time. All of the choppy whippy moves are making real-time guesses of the pattern a real challenge and I know traders are getting knocked silly with stops constantly getting hit before positions can even become profitable in many of the trades. Play it conservatively and wait for the break since there should be plenty to play in the move.

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

This Time is Different

by Jim Brown

Click here to email Jim Brown
Editor's Note

This company has had a lot of false starts and disappointments but they finally got it right. GoPro has been trashed severely over the last two years for over promising and under delivering. The deliveries have finally started.


GPRO - GoPro Inc - Company Profile

GoPro, Inc. develops and sells mountable and wearable cameras, and accessories in the United States and internationally. The company offers HERO line of capture devices, such as cameras; and mounts comprising equipment-based mounts consisting of helmet, handlebar, roll bar, and grip and tripod mounts that enable consumers to capture content while engaged in a range of activities, as well as mounts that enable customers to wear the mount on their bodies, such as wrist housings, chest harnesses, and head straps. It also provides LCD Touch BacPac, Battery BacPac, Smart Remote, and Floaty Backdoor accessories, as well as spare batteries, charging accessories, cables to connect its GoPro cameras to television monitors, video transmitters and external microphones, flotation devices, dive filters, and anti-fogging solutions. In addition, the company offers GoPro Studio, a video editing tool that allows users to create professional quality videos from their content; and GoPro App that allows users to control GoPro cameras remotely using a smartphone or tablet. Company description from FinViz.com.

Everybody knows the story of GoPro. They invented the action camera and the company was a smash hit. After they went public at $28 in 2014, shares rallied to more than $98 in the weeks that followed. They were making the talk show circuit almost weekly on CNBC, Bloomberg, etc. CEO Nick Woodman became a celebrity.

Then the problems started. The company's software was hard to use. New camera models did not work as expected. It was the perfect example of hyper growth without the growth of the infrastructure and products to support that growth. Competitors began to appear. Their cameras were cheaper and the software easier to use. The last model of the GoPro camera was flawed and the price was cut repeatedly.

The company promised great things ahead. It has been a long time since they released a product and they were faulted for that. However, rather than release another flawed product they took their time and made sure it was right.

This week they announced the new Hero5 camera and the smaller Hero5 Session camera. The big camera is $399 while the Session is $299. They have already exhibited the new cameras and given crowd demos and the excitement is growing. Both cameras are waterproof to 10 meters, capture 4K video at 30 fps. They have integrated voice control and microphones, with active noise cancellation. The Hero5 has a 12 megapixel camera and the Session has 10 megapixels. They Hero5 includes image stabilization, GPS capture and three stereo microphones.

The biggest news is an automatic upload feature to send content to GoPro's subscription based cloud making it easy to access, edit and share the content. They announced a new edit feature called Quik that allows users to instantly edit content on their phones and create short videos for sites like YouTube, Facebook and Instagram.

They also launched their Karma drone. It has been promised for two years and has finally arrived. When sold with the Hero5 it is $1,099 and $999 with the Session. The drone has received wildly enthusiastic reviews and should be a big seller.

The long time between model releases has nearly eliminated channel inventory and that means all the new production will go directly into revenue.

Earnings Oct 27th.

This will be a short fuse play with earnings co close. Shares are trying to break over resistance at $17.35 and we want to own the shares when that happens. However, the last two days has seen spikes over that level so we cannot use that as an entry trigger. We have to commit at the open tomorrow.

Buy GPRO shares, currently $17.12, initial stop loss $15.85.

No options recommended because of price. Expectation premiums are too high.


No New Bearish Plays

In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P-600 is locked in a solid trading range between 748-758 and there is no deviation. With the small caps deadlocked and the Dow and S&P-500 also trading in a range but less precise, investors seem to be waiting for a breakout in either direction before making a commitment. The Nasdaq pulled closer to a new high but it is also in a range only with higher boundaries.

If we continue to alternate gains and losses, traders will lose what little conviction they have and volume will slow to a crawl. That is when the market could turn dangerous.

The first two weeks of October are normally negative but given our chart patterns over the last several months I am not expecting any major decline. That does not mean it will not happen but we can drop significantly without damaging the charts. The 730 level on the S&P-600 is the critical level with 18,000 critical for the Dow.

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

FLXN - Flexion
The long stock position was opened with a trade at $20.15.

CREE - Cree Inc
The long stock recommendation has been cancelled.

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

AAOI - Applied OptoElectric - Company Profile


Piper Jaffray raised the price target from $24 to $27. Shares rallied 7.5%.

Original Trade Description: September 17th.

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

For Q2, the company reported adjusted earnings of 16 cents that beat estimates for 6 cents. Revenue of $55.3 million beat estimates for $50.8 million. For the current quarter the company guided to earnings of 16-21 cents and revenue of $56-$59 million.

AAOI is in the same optical sector as NPTN and is also experiencing rapid growth. However, the company's products are also used by cable TV providers. Amazon is AAOI's largest customer.

Last week AAOI won an order for 10,000 transceivers worth more than $5 million from a new company.

Zacks said the consensus earnings for AAOI have been rising rapidly as analysts upgrade their forecasts. Over the last month alone the consensus Q3 estimate has risen from 13 cents to 22 cents. Full year estimates have risen from 37 cents to 51 cents.

Earnings Nov 3rd.

Over the last three months, shares have rebounded from $9 to $21 as the earnings and outlook increased. Resistance is currently $22. With the super cycle getting a lot of headlines I believe the stock will break out.

I am putting an entry trigger on it just in case the recently volatile market gaps down.

Position 9/19/16:

Long AAOI shares @ $22.10, initial stop loss $19.25

ALRM - Alarm.com - Company Profile


No specific news. Very minor gain but held prior gains over resistance.

Original Trade Description: October 1st.

Alarm.com Holdings, Inc. provides cloud-based software platform solutions for the connected homes in the United States and internationally. It offers multi-tenant software-as-a-service platform that allows home and business owners to intelligently secure and manage their properties, as well as remotely interact with an array of connected devices through a single intuitive interface. The company provides interactive security solutions, which offer intelligent security and awareness services through a dedicated, cellular, and two-way connection to the home or business; and intelligent automation solutions that connects, integrates, and controls the devices in the home or business, such as security systems, garage doors, lights, door locks, thermostats, electrical appliances, environmental sensors, and other connected devices. It also offers video monitoring solutions, which provide live streaming, smart clip capture, high definition continuous recording, and instant video alerts through its mobile app or on the Web; and energy management solutions that offer enhanced energy monitoring and management services. It has approximately 2.6 million residential and business subscribers. Company description from FinViz.com.

For Q2, the company reported earnings of 15 cents compared to estimates for 11 cents. Revenue rose 24% to $64.4 million and beat estimates for $58.6 million. Software as a Service (SaaS) revenue rose 23% to $42 million. The company guided for the ful lyear for earnings of 49-51 cents and revenue of $242.3-$245.8 million. Analysts were expecting 48 cents on $241.7 million.

Earnings Nov 8th.

Despite the strong beat and strong guidance shares crashed from the historic high close of $33 before the earnings were released. Shares were up +135% since the February low at $14 and traders took profits. The only ratings change was from Raymond James from outperform to market perform based on value because of the strong gains. At the same time Imperial Capital raised their price target from $24.50 to $30. Since shares closed the day before at $30 that was an implied neutral rating.

Shares collapsed back to $28 and here there for three weeks then fell sharply on September 6th on no news to bottom at $25. That bottom was quickly bought and Friday's gain lifted the shares back over resistance at $28.50.

There is no bad press for Alarm.com. Earnings and revenue are growing, subscribers are growing and shares are back over resistance. If the market is going to rally in late October this should be a tech stock that outperforms.

Position 10/3/16 with a ALRM trade at $29.05

Long ALRM shares @ $29.05, see portfolio graphic for stop loss.

No options recommended because of price.

BOX - Box Inc - Company Profile


No specific news. A minor loss after a 14-month high on Tuesday.

Original Trade Description: September 15th.

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

In Q2, Box reported an adjusted loss of 14 cents that improved from the 28 cent loss in the comparison quarter. Analysts were expecting a loss of 19 cents. Revenue rose 30% and deferred revenue rose 40%. They had cash on hand of $173.33 million, up from $140 million in the comparison quarter.

The company added 4,000 new corporate customers including Electronic Arts (EA), Pfizer (PFE), AutoDesk (ADSK), Western Union (WU), Uber and the Federal Communications Commission (FCC) to bring their installed base to 66,000.

Box has adopted a neutral strategy. They joined with Microsoft in offering Office 365. They partnered with Alphabet to offer Google's suite of word processing, spreadsheets and other productivity tools known as Google Docs. Box will act as a third party content repository for Google Docs. That may seem odd since they also offer Office 365, which is a competing product suite but that is the key for Box. They are creating a common platform where customers can use the tools they like. One group of people in an office may like Office 365 and another group Google Docs.

Box also partnered with IBM to introduce Box Relay, which is a collaboration platform where outside users, fellow workers, etc, can be invited to participate in documents and worksheets and track changes, alert other users of changes and reduce bottlenecks in the workflow process. You no longer have to email a spreadsheet to other employees and then receive it back by email once they modify it, then add all the changes into the master document. Now it can all be done in the cloud in real time.

Box also partnered with Apple and Amazon in other collaboration projects.

By maintaining a neutral stance in the cloud, Box can take advantage of the current customers of other cloud customers. Everybody benefits because they are not competing but collaborating.

Box shares broke out of a long-term base this week and should be headed back to post IPO levels at $19 or higher now that their technology is receiving widespread acceptance.

Position 9/16/16:

Long BOX shares @ $14.74, see portfolio graphic for stop loss.

CREE - Cree Inc - Company Profile


No specific news. Shares are not moving. I am cancelling this recommendation.

Original Trade Description: September 28th.

Cree, Inc. provides lighting-class light emitting diode (LED), lighting, and semiconductor products for power and radio-frequency (RF) applications in the United States, China, Europe, South Korea, Japan, Malaysia, Taiwan, and internationally. Its Lighting Products segment offers LED lighting systems and bulbs for use in settings, such as office and retail space, restaurants and hospitality, schools and universities, manufacturing, healthcare, airports, municipal, residential, street lighting and parking structures, and other applications. This segment sells its products to distributors, retailers, and customers. The company's LED Products segment provides blue and green LED chip products for use in various applications, including video screens, gaming displays, function indicator lights and automotive backlights, headlamps, and directional indicators. It also offers XLamp LED components and LED modules for lighting applications; and surface mount and through-hole packaged LED products for video, signage, general illumination, transportation, gaming, and specialty lighting applications. In addition, this segment provides silicon carbide (SiC) materials for RF, power switching, gemstones, and other applications. Its Power and RF Products segment offers SiC-based power products consisting of Schottky diodes, SiC metal semiconductor field-effect transistors, and SiC power modules for use in power supplies used in computer servers, solar inverters, uninterruptible power supplies, industrial power supplies, and other applications. This segment also provides gallium nitride (GaN) high electron mobility transistors (HEMTs) and monolithic microwave integrated circuits (MMICs) for military, telecom, and other commercial applications; and custom die manufacturing services for GaN HEMTs and MMICs. Company description from FinViz.com.

Last week Cree introduced a new bulb portfolio of 25 new products. They offer better light quality, better dimming, better lifetime, better warranty and better pricing. LED lighting has finally gone mainstream.

Everybody hates to change light bulbs and the new product line has a life expectancy of 22 to 32 years. The light color has been improved and you can now dim them to as low as 1% output. The new bulbs are now guaranteed for a minimum of 10 years with a 100% satisfaction guarantee. The good news is that LED bulbs are only one of Cree's multiple product lines.

With the democratic political platform strongly green energy based and advocating products that reduce climate change, Cree should be at the top of the green list. The 60-watt replacement bulb offers the same 815 lumens of light but only consumes 9 watts of power. The downside is the cost at $12 for a 4-pack. The upside is a $135 savings in electricity over the 22.8-year life of the bulb.

Cree shares fell -4.50 to $23 when they missed earnings by a penny in August. They also lowered guidance on revenue for the current quarter. That is now behind them and shares are at a seven week high of $25.50. The last week of gains has been powered by multiple new product announcements and suggestions to buy before a Clinton presidency.

Earnings Oct 18th.

The earnings are only four weeks away so this will be a short term position to capitalize on all the "green" talk over the next several weeks.

Recommendation cancelled

FLXN - Flexion Therapeutics - Company Profile


No specific news. Shares blew through resistance at $20 as the biotech sector heated up again. Great way to start a new position.

Original Trade Description: October 4th.

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

The FDA has recently said that results from one phase 4 trial can support a FDA application for approval. Recently, Flexion reported positive results of a trial for Zilretta. The drug is a ne wform of treatment for chronic knee pain caused by arthritis. Typically, once a patient can no longer get by on aspirin or Advil, the next solution is quarterly shots of a corticosteroid. As time passes these shots have less of an impact on the pain and patients are suffering significantly before the quarter is over.

Zilretta provided a 50% improvement in pain relief and the lack of pain lasted for the entire trial. With more than five million patients currently on the corticosteroid treatment there is a huge market just waiting to be tapped. This is expected to be a billion dollar a year drug.

Flexion is going to market the drug itself rather than sell it off to some larger partner. They have been storing up cash and currently have $119 million with another $44 million in short term investments. The company only has $16 million in debt so net cash it is debt free. The company's market cap is only $500 million so a billion dollar drug could easily double the stock price.

They plan on filing the FDA application over the next couple months and that will be a major milestone for the company and should lift the stock. The approval will not be until late 2017 but we will be out of the position before the November earnings. We are just playing the buildup to the application.

Earnings Nov 3rd.

The $20 level appears to be resistance and it was tested on Monday. I am putting an entry trigger on the position just over $20.

Position 10/5/16 with a FLXN trade at $20.15

Long FLXN shares, see portfolio graphic for stop loss.

No options recommended because of wide spreads.

FNSR - Finisar Corp - Company Profile


No specific news. Shares gapped up after Ciena (CIEN) was upgraded to a strong buy at Zacks. The position trigger was $30.25 but shares opened at $30.46 so that is our entry point.

Original Trade Description: October 3rd.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Company description from FinViz.com.

Finisar shares rallied throughout the third quarter. In early September shares spiked after earnings and then leveled off but retaining a positive bias. They reported earnings of 38 cents that beat estimates for 30 cents. Revenue of $341.3 million also beat estimates for $334 million. The company guided for the current quarter for earnings of 44-50 cents on sales of $355-#375 million. Analysts were only expecting 32 cents and $344 million. The CEO blamed the soaring earnings on booming sales of certain transceivers and switches. China is in the middle of their upgrade to a 100 Gb infrastructure and the U.S. carriers like Verizon are just getting started.

Earnings December 8th.

Shares spiked from $23 to $27 on the news even after a big ramp up from $17 at the beginning of the quarter. Shares slowed their ascent but reached $30 last week. That is a five-year high. A move over that psychological resistance at $30 could start a new leg higher. The intraday high last week was $30.19. I am recommending we enter a position with a trade at $30.25.

Position 10/5/16 with a FNSR trade at $30.46

Long FNSR shares @ $30.46, see portfolio graphic for stop loss.

KS - KapStone Paper & Packaging - Company Profile


No specific news. Minor gain. Shares fell -4% to stop us out.

Original Trade Description: September 21st.

KapStone Paper and Packaging Corporation manufactures and sells containerboards, corrugated products, and specialty paper products in the United States and internationally. The company operates in two segments, Paper and Packaging, and Distribution. The Paper and Packaging segment offers containerboards consisting of linerboard and corrugated medium to manufacture corrugated containers for packaging products; and corrugated products. It also offers specialty paper products, including kraft paper comprising multiwall paper used to produce bags for agricultural products, pet food, baking products, cement and chemicals, and grocery bags; specialty conversion products, such as wrapping paper products, dunnage bags, and roll wraps; and lightweight paper. In addition, this segment provides saturating kraft paper under the Durasorb trade name for use in construction, electronics manufacturing, and furniture manufacturing industries; and unbleached folding carton board under the Kraftpak trade name to integrated and independent converters in the folding carton industry. Company description from FinViz.com.

On Sept 7th Kapstone announced it was spending $25 million in Q4 to build a new state of the art sheet plant in Ontario, California. They are also investing as a minority partner in a sheet feeder plant in the same city. The facilities will be producing paper by January 2017. The investments will boost Kapstone's annual capacity by over 60,000 tons. They recently completed an acquisition of Central Florida Box, which added 20,000 to 25,000 tons per year.

Kapstone is the fifth largest U.S. producer of containerboard and corrugated packaging products and the largest producer of kraft paper. They have 4 paper mills, 22 corrugated converting facilities and 65 distribution centers.

They reported adjusted earnings of 27 cents that missed estimates for 30 cents. Revenue of $784.9 million missed estimates for $823.8 million. However, revenue rose 17%. The earnings miss was due to the integration costs from multiple acquisitions, and less favorable product mix and the timing of planned maintenance outages. The CEO said this was temporary now that they have achieved the goal of integrating the 115,000 tons of supply from the Victory acquisition into Kapstone's mill and plant system. The company said earnings would now rise over the next 12 months thanks to the higher capacity.

Earnings Oct 26th.

Shares dipped only slightly after the July 27th earnings and have risen steadily in the weeks that followed. On Monday Bank of America upgraded Kapstone from underperform to neutral saying containerboard market conditions are improving and there is limited downside risk for Kapstone. They highlighted the robust revenue growth both in the recent past but expected in coming quarters.

Shares closed at a 9-month high on Wednesday with a breakout over resistance at $18.50.

Position 9/22/16 with a KS trade at $19.35

Long KS shares @ $19.35, see portfolio graphic for stop loss.

BEARISH Play Updates

PPC - Pilgrims Pride - Company Profile


No specific news. Shares rebounded to recover less than half of Tuesday's decline.

Original Trade Description: September 26th.

Pilgrim's Pride Corporation engages in the production, processing, marketing, and distribution of fresh, frozen, and value-added chicken products to retailers, distributors, and foodservice operators in the United States, Mexico, and Puerto Rico. It offers fresh chicken products comprising pre-marinated or non-marinated refrigerated (non-frozen) whole chickens, whole cut-up chickens, and selected chicken parts. The company also provides prepared chicken products, including portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties, and bone-in chicken parts. The company sells its products to foodservice market, including chain restaurants, food processors, broad-line distributors, and other institutions; and retail market customers comprising grocery store chains, wholesale clubs, and other retail distributors. In addition, it exports chicken products to the Middle East, Asia, the Commonwealth of Independent States, and other countries. Pilgrim's Pride Corporation was founded in 1946. Company description from FinViz.com.

The chicken business is becoming a lot more competitive. The consumer movement to free range chickens with no antibiotics and growth hormones is squeezing normal high volume breeders and reducing their market share. When your chickens have been previously grown in one square foot cages the change to free range brings a lot of problems and a decline in volumes. They are also faced with the growing occurrences of various bird flu breakouts.

PPC sells a lot of meat internationally and the prohibitions are growing against antibiotics and growth hormones. When an entire country becomes suddenly off limits because of new restrictions that can be costly.

In order to combat these problems the company spent large sums of money in research and development and now that debt has become a new burden in a shrinking marketplace. Earnings are also sensitive to price movement in the agricultural community with the cost of soybeans, corn and other feed grains continually rising. The fluctuating dollar is also a problem with their international sales.

Earnings Oct 26th.

Shares are about to trade at a 10-month low when they fall under $20.65. That could accelerate the selling as investors give up on the stock.

Position 9/27/16:

Short PPC shares @ $20.94, see portfolio graphic for stop loss.


Long Nov $20 put @ 70 cents, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


VXX not down as much as I would have expected. Must be a lot of traders worried about an October surprise.

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 market rally in Q4.

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.

ZOES - Zoes Kitchen - Company Profile


No specific news. Another big -3.6% decline to a new low. On Tuesday Forbes had a very negative article on Zoes and their increasing rate of cash burn.

Original Trade Description: September 27th.

Zoe's Kitchen, Inc., through its subsidiaries, develops and operates a chain of fast-casual restaurants. It operates a range of restaurant formats, including in-line, end-cap, and free-standing restaurants. As of August 22, 2016, the company operated 191 owned and franchised restaurants in 20 states of the United States. Zoe's Kitchen, Inc. was founded in 1995 and is based in Plano, Texas. Company description from FinViz.com.

For Q2, ZOES reported earnings of 6 cents that matched estimates. Revenue of $66.3 million missed estimates for $67.3 million The earnings were not the problem.

Same store sales rose only 4% and that was due to a 3.1% increase in prices so the real rise was only +0.9%. This compares to +8.0% in Q1. They also cut their guidance for the full year from 4.5% to 6.0% down to 4.0% to 5.0% and remember that includes a 3.1% price increase so the real comparable numbers are 0.9% to 1.9% sales growth.

The company also cut its revenue guidance from $277 - $281 million to $277 - $280 million, which is not a big drop but analysts were expecting $280 million so the midrange $278 million would be another miss.

Earnings Nov 14th.

The market appears saturated with fast casual restaurants and "earnings were not bad" is not sufficient to propel the stock higher given the decline in same store sales.

ZOES closed at a historic low at $23.80 on Sept 20th. Shares rallied on short covering in the market rebound but are headed back to set a new low.

Position 9/28/16:

Short ZOES shares @ $23.95, see portfolio graphic for stop loss.

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