Option Investor

Daily Newsletter, Wednesday, 10/26/2016

Table of Contents

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

Market Wrap

Coiling Patterns Hold

by Keene Little

Click here to email Keene Little
The market is waiting to get through the elections and in the process the major indexes are forming tighter trading ranges. Depending on one's interpretation of the consolidation patterns it can be argued they're bullish or bearish, leaving traders waiting for a break. We might be waiting for at least another week before that break.

Today's Market Stats

The market is on hold and it continues to chop up and down in a tightening trading range. That sentence describes the market for the past two months and it might not change until we get through the elections. It's driving traders crazy but at least we are likely much closer to the end of it than the beginning. The challenge will be figuring out which direction the break should occur.

There's very little affecting the market right now and with lower trading volume we're getting fast reversals of reversals, leaving traders trapped daily looking in the wrong direction. Trend traders are getting chopped to pieces and are giving up, which drives trading volume lower. While this might not change for at least another week, it's important to understand how the market typically frustrates the most traders to the point of giving up before establishing a new trend. The new trend is typically not believed until it's well underway. Our job is to figure out where and when that trend will start so that we can get a jump on it earlier than most traders.

I'll jump right into the charts, starting with the SPX weekly chart, to point out the patterns that could help us identify a trend change (from a consolidation or ending pattern to a new trending move). If you're very frustrated right now, join the club, but stay patient for a little longer so that you'll be ready to start trading again when the time is right (no later than post-election I believe).

S&P 500, SPX, Weekly chart

From a weekly perspective SPX continues to hold onto the bottom of a rising wedge pattern, which is the uptrend line from February-June and currently near 2150. Bears look at the break of the uptrend line on October 13th and not being able to recover back above the line as bearish. A break followed by back-tests should lead to lower prices, or so the theory goes in a normal market. In any case, the bulls really would be in a better position above 2150. But a descending triangle off the August high (better seen on the daily chart further below) is a bullish continuation pattern and it's looking like price could continue to consolidate for another week or two before breaking out to the upside. Of course if it breaks down instead, with a decline below the October low near 2114, it would leave behind a failed bullish pattern and that would likely be followed by strong selling.

S&P 500, SPX, Daily chart

On a daily basis I'm seeing short-term patterns getting blown up with the endless choppy consolidation that we've been in (over two months now). I can't help but feel there are some monied interests holding the market up to ensure a Clinton victory. I see signs of distribution but then indexes spike back up in order to keep the bears away. And if Clinton wins I can see the potential for a hurrah rally to follow, which from a longer-term pattern perspective would be the completion of the rising wedge shown on the weekly chart and that would in turn complete the cyclical bull off the 2009 low.

The descending triangle off the August highs is shown on the daily chart and this ideally will get one more up-down sequence to finish (around election day?). That would be a setup for a big rally to complete the cyclical bull (maybe to SPX 2250-2300). Short term there is the possibility that the descending triangle can be considered complete at any time and therefore a rally above the October 10th high near 2170 would be bullish. Between 2114 and 2170 we have to stay aware of the potential for more of the same choppy whippy price action, potentially into the elections.

Key Levels for SPX:
- bullish above 2170
- bearish below 2114

S&P 500, SPX, 60-min chart

A closer view of the price action inside the triangle is shown on the 60-min chart below. We have price-level S/R near 2145 and 2135 that price has been cycling around for the past two weeks, along with the bottom of the triangle near 2120 and the top of the triangle currently near 2158. As with all triangles, they're full of choppy price action and this one certainly has been no exception. I show an up-down sequence into election day to complete the triangle but obviously that's just speculation. For now it provides a road map to follow to help determine whether or not we're going to get a bullish setup out of this or if instead it breaks down or breaks out early.

Dow Industrials, INDU, Daily chart

The Dow got a bigger helping hand today, thanks to Boeing (BA), which finished up at 145.54 (+4.7%). It's a real heavy weight for the Dow and it single-handedly lifted the index, which made the Dow the only one in the green today. But its chart is no different from SPX as it hammers out what appears to be a descending triangle with all the choppy price action inside to support the interpretation. The bottom is near 18K and the top, depending on how the downtrend line is drawn, is near 18300 or 18345. The May 2015 high is at 18351 so there's double resistance near there for the bulls to break through. Above its October 10th high near 18400 would be bullish since it would be a breakout from the triangle and a rally back above its 50-dma, near 2158. But a break below 18K would indicate a breakdown from a bullish pattern and I would not want to be in long positions if that happens. Beware of more chop until we get the break one way or the other.

Key Levels for DOW:
- bullish above 18,400
- bearish below 17,992

Nasdaq-100, NDX, Daily chart

On Monday it looked like NDX finally broke free of its trend line along the highs from July-November 2015, currently near 4881. Tuesday it dropped back down to the trend line for a bullish setup with a back-test. All it needed was a rally today to keep things bullish. AAPL spoiled those plans with a disappointing earnings report (first sales decline in 15 years) in yesterday's after-hours session. That gapped NDX down this morning and left another bull trap with Monday's rally. The gap down put NDX back below the trend line which it broke above on Monday. This has been one frustrating index for bullish traders since we've seen repeated breaks of resistance that then turn into failed breaks and bull traps.

The choppy move higher from September 12th looks like a shallow rising wedge pattern with the top of the wedge being the trend line along the highs since September 22nd (where Monday's rally stopped) and the bottom of the wedge being the uptrend line from September 12th, currently near its March 2000 high at 4816. The rising wedge for NDX is a bearish ending pattern, which calls for a completion prior to the elections. This is very different from the bullish interpretation of the descending triangles for the blue chips and is a strong reason to doubt the bullish pattern. The flip side says if NDX breaks out of the rising wedge, with a rally above 4930 (the projection for where the 5th wave of the rally from June equals the 1st wave), bears will need to abandon the short side and head for the hills.

Key Levels for NDX:
- bullish above 4931
- bearish below 4760

Russell-2000, RUT, Daily chart

The RUT is the bearish index and as a sentiment index it's not a good sign for the bulls. It could be in just a larger pullback while the other indexes trade sideways/up but at the moment it's looking more bearish than bullish. On October 14th it broke its uptrend line from February-June, as well as price-level support near 1215. It repeatedly bounced back up but was held down by the broken uptrend line. Following Monday's back-test it sold off sharply yesterday, leaving a bearish kiss goodbye. But the bulls had another chance to power it higher since price-level support near 1215 held. But today's decline dropped the RUT below 1215 and then through support at 1205 (its December 2015 high and last tested on September 13th). It closed only marginally below support so there's still a chance for the bulls to come to the rescue but I don't see any reason to be long this index. Maybe if it gets back above Monday's high near 1232 (which was also a back-test of its broken 20-dma).

Key Levels for RUT:
- bullish above 1254
- bearish below 1205

High Yield Corporate Bond fund, HYG, Daily chart

In addition to the higher-risk small caps, the higher-risk bonds could be in trouble as well. I've mentioned HYG many times in the past as a good index to watch since it's a good reflection of risk-on vs. risk-off by investors. It's hard to see the break on the squished daily chart of HYG below but today's decline broke its uptrend line from February-June, currently near its 20-dma at 87.05. If that's the bottom of a rising wedge we could see faster selling develop. But a larger rising wedge, using an uptrend line from August 2 - September 13, currently near 86.35, could be the more important line to break since a drop to there could be followed by another leg up to finish the rising wedge later in November (which would keep it in synch with the bullish idea shown for the blue chips). An early breakdown is predicted by the RUT if it keeps selling off while we'll likely see more of a choppy rise higher if the blue chips keep their bullish patterns intact. In any case, this index could be a good canary for the broader stock market.

10-year Yield, TNX, Daily chart

The 10-year yield has been holding near the high set on October 12th and will either form a small double top here or press at least a little higher to trendline resistance just below 1.84%. Above 1.84 would be bullish for yields (bearish for bond prices) but at the moment, with a stall under the projection at 1.811 (two equal legs for a double zigzag wave count), I wouldn't be surprised to see yields start falling back down at any time, especially if tomorrow's Durable Goods report and Friday's GDP report are weak and further support the idea that the Fed will not have enough wiggle room to raise rates.

KBW Bank index, BKX, Daily chart

The banks have been relatively strong, presumably under the assumption they'll be in a stronger financial position with a rate increase from the Fed. The pattern for its rally from February is corrective (choppy with overlapping highs and lows within the move) and that means the entire thing has a high probability of getting completely retraced. The only question is how high it could go before rolling over. For a while, since it climbed above price-level S/R near 66.50 in July and then its downtrend line from July-December 2015, near 69.60 in mid-August, I've thought it could reach a price projection at 75.41 to achieve two equal legs up from February. With today's high at 74.87 it's within spitting distance of achieving that level. There's no guarantee it will reach that level or stop there but it's a level of interest to see if it's achieved and then rolls over after that.

U.S. Dollar contract, DX, Daily chart

The US$ remains on track to reach the top of its shallow down-channel off the March 2015 high, currently near 100.35. I show a projection to that level by the end of November to reach the top of its parallel up-channel from April at the same time. Obviously this is speculation but it would be a good setup for a reversal back down for one more test of the bottom of its down-channel in early 2017 before finally setting it up for a big rally.

Gold continuous contract, GC, Daily chart

Following gold's breakdown on October 4th into the low on October 7th it has tried to bounce back up and hold onto its 200-dma, currently at 1269.70, slightly above today's close at 1267.60. The bounce looks corrective and suggests at least another leg down and we could see it stair-step lower to price-level support at 1182, or perhaps to its May 31st low at 1199, before getting a bigger bounce. Note the breakdown from a descending triangle pattern that followed its July high, which had suggested we'd see another rally leg for gold. Instead, the breakdown led to strong selling, which once again shows how a failed pattern tends to fail hard. Longer-term there is the potential for much more selling in the future and a complete retracement of the 3-wave bounce off the December 2015 low (1046.80).

Silver continuous contract, SI, Weekly chart

Silver often leads gold since it has more of a production component whereas gold is often thought of as a currency hedge. Silver has been in a long-term down-channel since 2011 and the bounce off the December 2015 low into July 2016 high was just a 3-wave move up to the top of its down-channel. It would have been more bullish with a break of the down-channel and a rally above its July high near 21.23 would have me turning bullish both metals. The decline into the October 6th low was a break of its uptrend line for the bounce off last December's low. The bounce attempt since October 6th is a choppy sideways/up correction, which should be followed by another leg down. It should find at least temporary support near 16 and maybe on a back-test of the mid-line of its down-channel, which will be near 14.75 by the end of November. The overlap of its May high at 18.06 suggests a high probability that the December-July rally will be completely retraced and a drop down to the bottom of its down-channel could be next, perhaps down to it 2008 low at 8.40 by the end of 2017.

Oil continuous contract, CL, Daily chart

I've been watching an upside target zone for oil at 50.92 (its October 2015 bounce high) to 51.97 (two equal legs up from August 3rd. The October 19th high was 51.93 so 4 cents from the 51.97 target and I'd say close enough, especially now with the drop below the October 10th low at 49.15. (today's low was 48.87). It could still press higher and it would be bullish above 52 for at least a run up to price-level S/R near 58.50. But the bearish setup, which would be confirmed with a break of the uptrend line from August 3rd, currently near 46, is for oil to now head lower and drop below 26.

Economic reports

Thursday's economic reports include unemployment claims data and more importantly the Durable Goods Orders and Pending Home Sales. The bigger market impact could come from Friday's GDP data since that could influence the Fed, which is what the market reacts to.


We have been in an endless consolidation (over two months at this point) and it's driving traders crazy. These are the times when trend traders get chopped to pieces and finally give up at about the time the market is ready to trend again. Traders get used to the quick reversals with all the choppy price action and when a trend gets started they miss it because they expect the market to reverse again. This is the way the market frustrates the most traders and we're experiencing it again. Get ready for a trend to start since most traders have now been conditioned to not expect one.

But a new trend might not start until after the elections. Traders seem to be on hold (low trading volume) while waiting to get through this period of uncertainty. It's a little surprising the market hasn't declined during this period but I strongly suspect there are big-monied interests keeping the market from sinking in order to maintain the status quo -- those in power want to keep the power and those who have influence over the government (big money, whether that's banks, pharmaceuticals, big Ag or other corporate interests) want to keep that influence. This has created a strong support effort to get Clinton elected in order to extend the current power structure. That's not a political comment since it wouldn't matter which party was in power. In fact we've seen very little difference between the parties as far as how this country is run (into ruin).

The big question is which way the market is going to break. The pattern for the blue chips (descending triangles) suggests an upside break following the election. But keep in mind what happened to the bullish descending triangle for gold. NDX is in a rising wedge ending pattern and might have finished or could see a choppy sideways/up continuation to finish its rally shortly after the election. The RUT is threatening to break down now and that would not be a good sign for the broader market. Keep an eye on it and HYG for advance bearish warning (or not).

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

Last Christmas

by Jim Brown

Click here to email Jim Brown
Editor's Note

Rumors refuse to die about an impending bankruptcy for Kmart. All the actions taken by their parent Sears Holdings suggests there will be an announcement after the holidays and a large number of Kmart stores will be closed, possibly all of them.


No New Bullish Plays


SHLD - Sears Holdings - Company Profile

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of the end of May, this segment operated approximately 833 Kmart stores.

The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of the end of May, this segment operated 709 Sears stores. Sears Holdings Corporation was founded in 1899. Company description from FinViz.com.

After 117 years, Sears is about to go the way of the dinosaurs. The chain has not been able to keep up with the changing times and the competition from online retailers. The company announced in mid September it was closing 64 additional Kmart stores in addition to the 68 Kmarts and 10 Sears stores previously announced in July. In May, they warned the total store closings for the year would reach 170 so they are well on their way.

The chain has lost more than $9 billion in recent quarters and were it not for investments by Edward Lampert and sales of real estate for $2.7 billion the store would already be out of business. In Q2 Sears lost $395 million and ended the quarter with only $276 million in cash on hand. CEO Lampbert agreed to loan the company another $300 million so they could survive another quarter. Moody's warned that Sears and Kmart do not have enough cash to stay in business. Moody's said the company was bleeding cash and would have to continue relying on real estate sales, sales of assets or outside funding to sustain operations. Moody's estimated their cash burn was $1.5 billion a year. In August, Sears reported cash on hand of only $276 million and not near enough to buy inventory for the holiday shopping season. The company's minimum pension contributions for 2016-2017 are $596 million and nearly twice the cash on hand.

In Q2, sales fell -8.8% to $5.7 billion. Same store sales for Sears fell -7% and -3.3% for Kmart.

In 2000, Sears had sales of $41 billion a year. That declined to $15 billion in 2015. Over the same period Kmart sales have fallen from $37 billion to $10 billion. Sears has funded debt of $3.5 billion and unfunded pension liabilities of $2.1 billion.

Shoppers claim when they do go to a Sears store they have to beg them to take their money. Many report wandering around the floor for a long time just trying to find a sales person to handle their sales. Other say they have quit going back because the shelves are bare and the merchandise they do have has been picked over so much there is nothing left but scraps.

Shoppers at Kmarts claim the store has been using sheets and shower curtains to hide empty shelves and closed departments.

The recent cash burn headline from Moody's may have put Sears into its final death spiral. The shelves are empty, cash is limited and Lampbert is not going to continue putting good money into a bad investment. This could be a long-term position.

In late September, Fitch warned that Sears had a high risk of bankruptcy within a year. The 114 page report showed a heightened risk of bankruptcy with Sears, Claire's Stores and Nine West Holdings. Fitch said consumers are abandoning the shopping mall in favor of online shopping or local boutique stores. Fitch also said a Sears bankruptcy would obliterate Seritage, the REIT spun off from Sears last year to generate $2.8 billion in cash. Seritage has 266 retail properties with 170 leased to Sears and 82 leased to Kmart. About 79% of Seritage's rental income comes from Sears. The retailer has already filed notice of termination for 17 stores totaling 1.7 million square feet at the end of January.

Last week Detwiler Fenton warned that Sears was apparently working on monetizing its real estate. DF said the number of Kmart closures was going to accelerate in order for Sears to raise cash and offset the burn rate. DF said Sears had sent directives to a large number of stores telling them to clear backroom inventories. They also began cutting prices on appliances by 50% and using heavy promotions to reduce inventory. They also noted that Sears was moving appliance inventories from Kmart stores into certain locations suggesting a new round of store closures was coming.

Also making headlines last week was Jakks Pacific halting shipments of much needed toys to Kmart for fear of not being paid. Multiple reports suggested a potential post holiday bankruptcy filing. BMO Capital Markets said it had been asked repeatedly by other suppliers if they should continue shipping merchandise to Sears and Kmart. This news could not come at a worse time for Kmart ahead of the holiday shopping season. Once the news spreads of one supplier halting shipments, it is sure to spread to other suppliers as well. This could be Kmart's last Christmas.

Earnings December 1st.

Shares bounced on a suggestion they might be preparing a real estate sale but are returning to the lows. A trade under $10.50 would be a 13-year low.

Sell short SHLD shares, currently $10.96, initial stop loss $12.05.

No options recommended.

In Play Updates and Reviews

Small Cap Trouble

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 crashed through support at 1,210 for a -1% decline suggesting trouble ahead. The Russell is now facing support at 1,200 that is super critical since there is nothing else below that level until 1,100. That could be a fatal market blow.

The end of October window dressing has yet to appear and at this late date the odds of a decent rebound are sinking fast. The indexes appear to be setting up for a potential market drop before the election as investors move to the sidelines because of the uncertainty.

The Russell 2000 and the Nasdaq 100 are the two indexes to watch for the rest of the week. Either one or both could tank the broader market. Thursday is a big day for Nasdaq big cap earnings after the bell and that would impact the market on Friday. At that point it is too late for end of October window dressing.

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

FNSR - Finisar
The long stock position remains unopened until a trade at $30.15.

CSIQ - Canadian Solar
The long stock position remains unopened until a trade at $16.15.

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 - Company Profile


No specific news. Minor gain to a new high.

Original Trade Description: October 17th.

The Chemours Company helps create a colorful, capable and cleaner world through the power of chemistry. Chemours is a global leader in titanium technologies, fluoroproducts and chemical solutions, providing its customers with solutions in a wide range of industries with market-defining products, application expertise and chemistry-based innovations. Chemours ingredients are found in plastics and coatings, refrigeration and air conditioning, mining and oil refining operations and general industrial manufacturing. Our flagship products include prominent brands such as Teflonâ„¢, Ti-Pureâ„¢, Krytoxâ„¢, Vitonâ„¢, Opteonâ„¢ and Nafionâ„¢. Chemours has approximately 8,000 employees across 35 manufacturing sites serving more than 5,000 customers in North America, Latin America, Asia-Pacific and Europe.

Chemours was spun off from DuPont in 2015. The company spent hundreds of millions of dollars developing hydrofluoroolefin (HFO)-based alternatives and blends with low global warming potential. These replace the hydrofluorocarbons (HFCs) that were used in air conditioners for decades and reportedly responsible for global warming.

The UN's Montreal Protocol calls for HFCs to be phased out and replaced. Chemours has created a replacement and expects more than 24 million vehicles to be on the road in 2016 using their HFO-1234yt (Opteon) product in their air conditioners. By the end of 2017 that number will rise to more than 50 million. They believe by 2025 the HFO-based solutions will have replaced 325 million tons of Co2 equivalents. The Opteon product line has been widely accepted and nearly every refrigeration manufacturer is moving in that direction.

For Q2 they reported adjusted earnings of 27 cents that easily beat estimates for 17 cents. Management delivered more than $100 million in cost reductions in the first six months of 2016.

Earnings Nov 3rd.

CC has been moving up steadily since August as analysts began coverage and the company beat on earnings on August 8th. Over the last 30 days consensus estimates for Q3 have risen from 26 cents to 30 cents. Full year estimates have risen from 77 cents to 84 cents. Rising estimates suggest the stock will continue higher.

After a $7 rally since the earnings, the stock pulled back last week and found support at $14.75. Shares were up today on the UN news since it means even more manufacturers will be forced to switch to the HFO products.

Position 10/18/16 with a CC trade at $15.45

Long CC shares @ $15.45, see portfolio graphic for stop loss.

No options recommended.

CSIQ - Canadian Solar - Company Profile


No specific news. High today $15.49.

This position remains unopened until a trade at $16.15.

Original Trade Description: October 20th.

Canadian Solar Inc., together with its subsidiaries, designs, develops, manufactures, and sells solar wafers, cells, and solar power products primarily under the Canadian Solar brand name. The company operates through Module, Energy Development, and Electricity Generation segments. Its products include various solar modules that are used in residential, commercial, and industrial solar power generation systems. The company also provides specialty solar products consisting of Andes Solar Home System, an off-grid solar system, designed to provide an economical source of electricity to homes and communities without access to grid; and Maple Solar System, a clean energy solution for families, as well as solar system kits, which are a ready-to-install packages, such as inverters, racking system, and other accessories. In addition, it develops, builds, and sells solar power projects; performs the engineering, procurement, and construction (EPC) work for the solar projects; and offers operation and maintenance services that include inspection, repair, and replacement of plant equipment, site management, and administrative support services. It offers its products to distributors, system integrators, project developers, and installers/EPC companies. Company description from FinViz.com.

Canadian Solar has a global pipeline of commercial and utility installations in progress of 2.4 gigawatts of power. Last week they bought a 49% stake in two 15 megawatt solar projects in Telangana India. The projects come with a 25 year power purchase agreement and a 5.54 rupee tariff per kilowatt hour.

This is just one more project for CSIQ as the continue to grow in scale and extend their reach around the world. They have installed more than 16 gigawatts across 90 countries since 2002 but this is their first project in India. Australia recently approved funding for two projects totaling 47 megawatts with a 20 year power purchase contract. The 17 Mw Longreach project will consist of 54,600 MaxPower2 solar modules and produce 39.0 gigawatts of power in the first year. The 30 Mw Oakey project will use 93,600 solar modules and produce 59.9 gigawatts of power the first year.

The company had $3.47 billion in sales last year with $171 million net profit. They are currently priced very cheaply at a PE of 11 times earnings. They have more than $500 million in cash and their market cap is only $900 million. Sales are growing at a rapid rate.

Earnings Nov 10th.

Share have resistance at $16 and then clear sailing until $20.

With a CSIQ trade at $16.15

Buy CSIQ shares, currently $15.70, initial stop loss $14.35

Optional: Buy Nov $17 call, currently .65, no stop loss.

FNSR - Finisar - Company Profile


No specific news. Still fighting resistance at $30. High today $29.90 to miss our entry by 25 cents.

This position remains unopened until a trade at $30.15.

Original Trade Description: October 19th.

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.

We entered a FNSR position on October 4th just as shares gapped open to $31. That turned out to be the peak for a three month rally. After a week of declines the shares could be ready to move higher.

The declines were sector related. The optical networking stocks were all slammed after some guidance warnings in the space. Finisar was riding the crest of a Goldman Sachs upgrade to buy on the 11th. That caused the peak in the stock just as the sector news appeared.

I am putting an entry trigger on this position to make sure the stock can get over recent resistance before we buy it.

With a FNSR trade at $30.15

Buy FNSR shares, currently $29.65, initial stop loss $28.75

No options recommended.

HLX - Helix Energy Solutions - Company Profile


The company announced a $125 million offering of convertible senior notes due 2022. The proceeds will be used in part to repurchase a portion of the convertible senior notes due in 2031, repayment of other indebtedness and general corporate purposes. Shares down only 7 cents on the news and weak oil prices.

Original Trade Description: October 24th.

Helix Energy Solutions Group, Inc., provides specialty services to the offshore energy industry primarily in the Gulf of Mexico, North Sea, the Asia Pacific, and West Africa regions. It operates through three segments: Well Intervention, Robotics, and Production Facilities. The company engineers, manages, and conducts well construction, intervention, and abandonment operations in water depths ranging from 200 to 10,000 feet; and operates remotely operated vehicles (ROVs), trenchers, and ROVDrills for offshore construction, maintenance, and well intervention services. It also offers well intervention; intervention engineering; production enhancement; inspection, repair, and maintenance of production structures, trees, jumpers, risers, pipelines, and subsea equipment; and life of field support. In addition, the company provides reclamation and remediation services; well plugging and abandonment services; pipeline abandonment services; and site inspections. Further, it engages in the installation of subsea pipelines, flowlines, control umbilicals, manifold assemblies, and risers; burial of pipelines; installation and tie-in of riser and manifold assembly; commissioning, testing, and inspection activities; and provision of cable and umbilical lay, and connection services. Additionally, the company offers oil and natural gas processing services to oil and natural gas companies; and fast response system services. It serves independent oil and gas producers and suppliers, pipeline transmission companies, alternative energy companies, and offshore engineering and construction firms. Company description from FinViz.com.

Last week Helix reported earnings of 10 cents compared to estimates for 4 cents. Revenue of $161.2 million beat estimates for $156.4 million. The company said they had "seen a significant improvement in their financial results but industry conditions remain challenging."

An increase in the price of oil would do wonders for Helix and all the other offshore service businesses. Fortunately, for Helix they operate around the world and there is a strong surge in offshore natural gas drilling and pipeline construction around Africa and Australia. They are also very active in the North Sea. The natural gas activity has kept them afloat where other offshore service companies have failed.

They sold $100 million in stock in Aug/Sep and they had $499 million in cash at the end of the quarter. They prepaid $8 million in debt in Q3 and capex spending was $99 million.

The company is in good shape financially and the offshore drilling activity is increasing. If OPEC is successful in claiming a production cut/halt at the end of November this will raise the price of oil and benefit everyone.

Earnings January 18th.

Position 10/25/16:

Long HLX shares @ $10.18, see portfolio graphic for stop loss.

No options recommended.

MENT - Mentor Graphics - Company Profile


No specific news. New closing high.

Original Trade Description: October 13th.

Mentor Graphics Corporation provides electronic design automation software and hardware solutions to design, analyze, and test electro-mechanical systems, electronic hardware, and embedded systems software worldwide. It offers printed circuit boards; Mentor Graphics Scalable Verification tools; Questa platform to verify systems and integrated circuits (ICs); FastSPICE, Eldo, and ADVance MS analog/mixed signal simulation tools; and Veloce hardware emulation system. Further, the company provides software, tools, and professional engineering services; and methodology development, enterprise integration, and deployment services. It sells and licenses its products through direct sales force, distributors, and sales representatives to the communications, computer, consumer electronics, semiconductor, networking, multimedia, military and aerospace, and transportation industries. Company description from FinViz.com.

Billionaire Paul Singer, head of Elliott Management, announced on Sept 29th his firm was taking an active 8.1% stake in Mentor Graphics. In the SEC filing Elliott said there are "strategic opportunities" available at MENT and he is going to force a sale. Singer is no stranger to activist investing. Since 1994 he has launched 114 campaigns and 14 proxy fights when companies do not take his advice and get the M&A ball rolling. Elliott has $27 billion under management and Mentor only has a $3 billion market cap. If the board does not take action quickly, Elliott could launch a proxy fight to get enough people on the board that will take action. As a relatively small company, Mentor is in the crosshairs and there is very little chance for escape.

Shares spiked in the middle of the day on Thursday after TheStreet posted an article explaining Elliott' s game plan. The close at $27.92 was a 15-year high. Since Elliott announced his position at $24.69 the shares have risen about $3.50 with $2 of that the first day. Elliott is in for the long term and they will not be bailing on a $3 gain. They have a much larger goal in mind.

Earnings Nov 17th.

A lot of investors follow these activist funds and I would expect the stock to continue to rise as the headlines appear. More than 7,000 Jan $30 calls were bought today against an open interest of only 3,944.

Because of the afternoon spike I was going to put an entry trigger on the position just over the afternoon high. However, the S&P futures are down hard again tonight and maybe we will get an opportunity to buy the stock lower so I did not add the trigger. Support is $26.

Position 10/14/16:

Long MENT shares @ $28.54, see portfolio graphic for stop loss.


Long Jan $30 call @ $1.35, no stop loss.

We will hold the option as a lottery ticket play is the long stock position is stopped.

BEARISH Play Updates

SSYS - Stratasys Ltd - Company Profile


No specific news. GE's tender offer for 3D printer SLM Solutions in Germany expired on Monday and GE did not extend it. That suggests the offer is dead and GE has decided to look elsewhere. The last time GE was looking at 3D printing companies 3D Systems (DDD) and Voxeljet (VJET) shares rose on the potential for a GE acquisition. Stratasys was not included in the speculation. Shares of SSYS did rise today by 17 cents because of the uncertainty over GE's plans.

Original Trade Description: October 22nd.

Stratasys Ltd. provides three-dimensional (3D) printing and additive manufacturing (AM) solutions for the creation of parts used in the processes of designing and manufacturing products; and for the direct manufacture of end parts. Its 3D printing systems utilize its patented fused deposition modeling (FDM) and inkjet-based PolyJet technologies to enable the production of prototypes, tools used for production and manufactured goods directly from 3D CAD files or other 3D content. The company offers entry-level desktop 3D printers to systems for rapid prototyping, and production systems for direct digital manufacturing under the Dimension, Objet, Fortus, Polyjet, SolidScape, and MakerBot brands, as well as MoJo and uPrint product families, and Dental Series products. It also provides 3D printing consumable materials, including FDM, cartridge-based materials, Polyjet cartridge-based materials, Smooth Curvature Printing inkjet-based materials, and non-color digital materials, as well as provides color variation services. In addition, the company offers customer support, basic warranty, and extended support programs; leases or rents 3D printers and 3D production systems; produces prototypes and end-use parts for customers from a customer-provided CAD file; and provides plastic and metal parts for rapid prototyping and production processes, as well as related professional services. Further, it operates Thingiverse, an online community for sharing downloadable, digital 3D designs; and GrabCAD Community for mechanical engineers and designers. The company's products and services are used in aerospace, automotive, consumer electronics, consumer goods, medical processes and medical devices, education, dental, jewelry, and other industries. Company description from FinViz.com.

Stratasys does not report earnings until Nov 15th. Piper Jaffray believes they will miss on revenue because of a recent survey of 68 firms showed "extremely discouraging" demand for SSYS and 3D Systems (DDD) products. Stratasys is expected to post its first year over year profit in 8 quarters because of extensive cost cutting but revenue is expected to fall short of the $174.5 million consensus estimate.

The challenge is the entry of the 800 pound gorilla into the 3D market. That gorilla is Hewlett Packard. They announced their entry into the market five months ago and will begin shipping products over the next two months. Piper and some other analysts said buyers are waiting to commit to purchases until they actually see the HP products. The HP product line is expected to be robust and priced competitively. Another manufacturer, privately held Carbon 3D, is also drawing attention and suddenly buyers have an entire array of 3D printers and manufacturers to choose from. GE just bought a 3D printing company in Europe and is expected to expand the offering in a big way given their available cash and manufacturing experience. Because of the expense on some of these printers, buyers are taking the extra time to make sure they buy the one that fits their needs the best.

Shares are trading at a 3-month low and only about 50 cents above an 8-month low. If support at $19.35 fails we could see $15 in a hurry as investors flee before the mid November earnings.

Position 10/14/16:

Short SSYS shares @ $19.97, see portfolio graphic for stop loss.

No options recommended because of distance from the strike and short time frame.

VXX - Volatility Index Futures - ETF Description


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.

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