Option Investor

Daily Newsletter, Wednesday, 11/2/2016

Table of Contents

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

Market Wrap

Longest Losing Streak In Five Years

by Keene Little

Click here to email Keene Little
Everyone is making a big deal about the longest losing streak for the stock market in five years, down 7 days in a row after today's loss. Many argue it means nothing but concern over the uncertainty about the upcoming elections but there's some historical precedent for the losing streak and its importance in predicting what will happen next.

Today's Market Stats

A string of losses for 7 or more days in a row has only happened 3 times in the last 20 years and now we have the 4th time with today's loss. Each of the prior 3 times coincided with a major financial crisis for the market to deal with. The worst losing streak was an 8-day with the Lehman Brothers failure in October 2008. The next two times were 7-day losses when the U.S. debt was downgraded in July/August 2011 and then when the EU experienced its financial crisis in November 2011 (when the cost of insurance for EU debt climbed to a record level). The market sniffs out trouble in advance and the losing streak has been indicative of trouble ahead.

The interesting supposition here is that the current 7-day losing streak might be portending a Trump win, which most believe would cause a larger selloff in the stock market. Wall Street has made it abundantly clear it wants Clinton to win since it would keep the current power structure and influence in place.

Trump is a huge unknown and the market hates uncertainty, which is one reason why the market has been declining -- Trump is climbing in the polls and now the race is in many respects too close to call. Keep in mind that Brexit was not supposed to happen according to the elitists and mainstream media. The market will rally if Clinton wins but she's damaged goods following the latest email scandal and her presidency would hardly go smoothly. Many Republicans are out for blood. It's all reason enough to feel very uncertain about what's next.

The market is not paying much attention to anything else at the moment but this morning's ADP Employment report didn't help the market's mood. The report showed employment climbed 147K, which was below expectations for 165K and much less than 202K in September (revised up from 154K). The market has been expecting Friday's nonfarm Payrolls report to show an increase from 156K to 175K so there's the possibility for disappointment from that report.

This afternoon's FOMC announcement was a non-event since no one expected the Fed to change anything. They continue to jawbone the market into thinking it will be able to raise rates in December (their last chance to raise rates in 2016, something they've been attempting to do since last December) but their wording is basically "we think we can, we think we can, we think..." What they actually said was "The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of further progress toward its objectives."

Before the FOMC announcement the odds for a rate hike stood near 70% and then after the announcement the odds increased to 80%. But the bond market is not showing any real concern about a rate increase since it has been rallying since November 1st, including today, and pulled back only a little after the announcement. A bond rally of course drops the yield and that's in defiance of the Fed wanting to raise rates.

The stock market has clearly been bearish, with a 7-day losing streak, but it's not been as bearish as previous losing streaks. Between the "losing less" and the choppy pattern we've been in since August, it's not hard to argue the bullish case here, especially if we continue to see a choppy consolidation into the election and Clinton wins. Look out above if that happens. Conversely, the choppy decline could be the beginning of a waterfall decline and if Trump wins we're going to see the waterfall decline accelerate to the downside. Both possibilities need to be respected and at the moment I could argue a case for either one. We'll have to let price action, with the help from charts, tell us which direction to trade.

S&P 500, SPX, Weekly chart

The descending triangle pattern for SPX that I had been tracking for the past several weeks, which is typically a bullish continuation pattern when it follows a rally, was broken this week with the decline below 2120. Failed patterns tend to fail hard and that leaves SPX vulnerable to a strong selloff from here. There is one other potentially bullish way to look at the pullback, which I discuss with the daily chart below, so I wouldn't say the bears have a slam-dunk setup here but if you're long you need to understand the risk here. The first thing the bulls need to do is recover SPX back above 2135, which would be a heads up that a new rally could be starting.

S&P 500, SPX, Daily chart

On the SPX daily chart I added a parallel down-channel for the move down from August, the bottom of which is currently near 2100 and SPX closed marginally below it today. This down-channel can be interpreted as a bull flag pattern, especially with the choppy price action we've seen since August. I would expect this down-channel to hold if it's to remain bullish so today's throw-under needs to turn right back up on Thursday if the bullish potential is to play out. But if the selling continues I would watch to see what happens near the price projection at 2089.54, which is where the move down from September 22nd would have two equal legs down and where it could complete a corrective wave pattern that will then lead to a new rally. But if SPX drops below its 200-dma, currently near 2081, I think it would be a strong statement that the market is in trouble and the 7-day loss we've seen would be predicting another strong market decline.

Key Levels for SPX:
- bullish above 2135
- bearish below 2081

Dow Industrials, INDU, Daily chart

The Dow has been holding up relatively well compared to the other indexes but it too is threatening to break down. It has had the "cleanest" descending triangle for the consolidation following the August high, and the expectation out of this pattern has been another rally leg. Breaking down below 18000 would leave it a failed pattern and that would signal strong selling ahead. But at the moment the breakdown is marginal and could still recover. It would have been better for the bulls if it recovered today instead of closing lower, but today is the first close below 18K and therefore it has another chance to recover. Similar to SPX, there is one other pattern that could be playing out, which is also a bullish one and I show it on the 120-min chart next.

Key Levels for DOW:
- bullish above 18,260
- bearish below 18,000

Dow Industrials, INDU, 120-min chart

Instead of a descending triangle for the Dow and instead of a parallel down-channel like for SPX, it's possible the Dow has been hammering out a bullish descending wedge for the pullback from August. The bottom of the wedge is the line along the lows from September 12 - October 13, which is currently near 17930, and it was tested with this afternoon's low. Much below 17925, on a closing basis, would tell us the descending wedge idea is not correct but for the moment it's a warning for bears not to get complacent here since the wedge tells us the entire pullback from August (18668) will be retraced and relatively quickly. The bullish interpretation portends a win for Clinton.

Nasdaq-100, NDX, Daily chart

On Monday NDX broke down from a bearish rising wedge but Tuesday's decline put an exclamation point on the breakdown. This pattern points to a fast decline to the beginning of the wedge, which is the September 12th low at 4656, before we'll see an appreciable bounce correction. But the market is short-term oversold (7 days down in a row) and could get at least a bounce at any time. There is of course the possibility that the big sideways consolidation since August is a bullish continuation pattern and will lead to another rally leg. A rally above 4840 would have me thinking a little more bullishly but for now it's looking more bearish.

Key Levels for NDX:
- bullish above 4840
- bearish below 4740

Russell-2000, RUT, Daily chart

The RUT has been the leader to the downside and while the blue chips were fighting gallantly to hold support the RUT was breaking down. The techs followed and finally the blue chips, which tells us risk-off has been the trade lately and that could continue at least into the elections. Risk-on will be the play if Clinton wins but right now there's too much worry about what could happen if Trump wins and investors have been bailing out of the riskier small caps. On Tuesday the RUT broke double support at the bottom of an up-channel from April and the bottom of a down-channel from September. Today's selling put an exclamation point on the breakdown and now we wait to see if price-level support near 1160 will hold. It's more bearish below that level, to at least its 200-dma near 1149, and potentially down to its uptrend line from March 2009 - October 2011, currently near 1114. If 1160 holds I see the potential for a big bounce in November before heading back down and if it gets back above 1215 I'd start thinking more bullish, such as a run to new highs.

Key Levels for RUT:
- bullish above 1215
- bearish below 1176

10-year Yield, TNX, Daily chart

Monday saw the 10-year gap up to 1.879, a little higher than I thought it would reach with this rally, but it was only a minor jump above the top of a parallel up-channel for the rally from July. Tuesday it gapped up again and tested the high before selling off sharply (with a bond rally). Today it broke below a short-term uptrend line from September 29th, currently near 1.819, and suggests yields could be starting back down (with a rally in bond prices).

High Yield Corporate Bond fund, HYG, Weekly chart

I've been suggesting recently to keep an eye on HYG since it's a good reflection of how much investors are willing to hold onto the riskier end of bonds. HYG has been underperforming the stock market for a long time and that's been a longer-term warning for stock market bulls. On October 26th it broke down from a rising wedge for the rally from February and the past two weeks have seen strong selling, which can be seen on its weekly chart below. As you can see on the chart, previous breaks of rising wedges have led to sharp selloffs and I expect to see more selling for HYG. Currently it's testing its broken downtrend line from June 2014 - April 2015, near 84.80 (today's low was 84.81) and it could get a bounce before heading lower (similar to the possibility for a stock market bounce).

Corporate High Yield Bonds A-D line vs. SPX, chart courtesy mcoscillator.com

Supporting a reason to feel more bearish than bullish HYG is shown on a chart done by Tom McClellan. The red line shows the advance-decline line for Corporate High Yield bonds and previously when it had made a lower high vs. a higher high for SPX it then led to a strong correction in the stock market. That's the current situation. Also, when the red line broke its uptrend line (gray dotted lines) it wasn't long before the stock market followed. The uptrend line from February has been broken and SPX broke its uptrend line from February last week.

Transportation Index, TRAN, Weekly chart

We have a potentially bullish signal from the Transports, which have not succumbed to the selling seen in the broader market. That's bullish divergence and it needs to be respected by the bears. The choppy consolidation since October 4th looks like a bull flag continuation pattern and a break above 8150 would signal a new rally leg. There is the potential for a decline to kick into gear and a drop below 7850 would be a bearish heads up. It might be good for only a drop down to the uptrend line from January-June, which will cross its uptrend line from March 2009 - October 2011 near 7625 at the end of the month. From there another bounce back up to the top of a possible ascending triangle, near 8150, would be a setup for stronger selling.

U.S. Dollar contract, DX, Daily chart

The US$ has pulled back from last week but still well within an up-channel from May. The uptrend line from May-August is currently near 95.65, a little below its 200-dma at 95.90, and I would not begin to turn bearish the dollar until it drops below 95.50. It could pull back a little further but I continue to look for higher prices for the dollar, probably near 100 before starting another pullback in its larger consolidation pattern.

Gold continuous contract, GC, Daily chart

Gold has returned to the scene of the crime, which was the breakdown on October 4th from what was a bullish descending triangle that ran from July through August. The bounce off the October 7th low has now made it back up to the breakdown level at 1308 (today's high was 1309.30 and it closed at 1297.80). This is a classic back-test of support-turned-resistance and the play here is to short gold. A tight stop just above today's high makes for a low-risk play.

Oil continuous contract, CL, Daily chart

Oil peaked out near the 51.97 projection, for two equal legs up from August 3rd, with the high at 51.93 on October 19th. From there it has dropped back down and today it closed below its uptrend line from August as well as back below its broken downtrend line from June, both of which crossed today near 46. The setup is for oil to continue lower, although a bounce correction first is a possibility, and it takes a rally above 52 to show us the bulls remain in control.

Economic reports

Tomorrow's two reports tomorrow at 10:00, Factory Orders and ISM Services, have the potential to be market moving, but the big report will be Friday's NFP report since it will affect how much the Fed thinks it can raise rates in December.


There are short-term bullish divergences showing up on the intraday charts when looking at today's lows vs. yesterday's. The market is short-term oversold and the bullish divergence could be pointing to at least a higher bounce in the coming days. There's been heavier-than-normal put buying in the past 3 days and that's usually a good indication the market is reaching an oversold condition. Whether or not a bounce, if we get it, develops into something impulsive to the upside or only a choppy consolidation instead will tell us more about what to expect after the bounce.

The big unknown of course is how the election will go and what kind of reaction we'll see from the market. The assumption at this point is that it will rally with a Clinton win, which means the pullback we've seen will be just a correction and will lead to a new rally leg into the end of the year. But if Trump wins then I think the choppy pullback we've seen so far will be followed by a waterfall decline. Looking at the shape of the decline from August you can see it steepening and that could be foretelling the waterfall. In either case, I think flat or a straddle/strangle position on election day (the 8th) would be the best way to deal with the market. A directional play could be a big win or big loss and that makes it a high-risk play.

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

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New Plays

Negative Outlook

by Jim Brown

Click here to email Jim Brown
Editor's Note

With the small caps imploding and 4 trading days until the election is over, the outlook is negative. Tightening poll numbers continued to weigh on the market and fund managers are fleeing the small caps. Unfortunately, it looks like we are headed for another dip on Thursday with the S&P futures down -5 when the evening session opened. There is no reason for us to jump into the high volatility just so we can be stopped out a day later. I recommend we remain on the sidelines until the volatility eases.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Lookout Below

by Jim Brown

Click here to email Jim Brown

Editors Note:

The only chart you need to watch is the Russell 2000, currently at a four-month low. The small caps continue to lead the market lower. Their lack of liquidity and the urgency by fund managers to remove risk from their portfolio is causing the small caps to implode.

The Russell closed at the low for the day and it remains unsupported until the 1,100 level. That does not mean it cannot rebound because a headline generated short squeeze can happen at any time. There are four trading days left before the election is over and the market is locked in a decline. I would expect further weakness as the election uncertainty increases.

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

No Changes

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

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3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

MENT - Mentor Graphics - Company Profile


MENT recovered from the intraday on Monday to trade at a new intraday high today. The company announced expanded Mentor Embedded Linux support for the latest AMD G-series of processors.

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 Jan $30 call @ $1.35, see portfolio graphic for stop loss.

Previously Closed 11/1/16: Long MENT shares @ $28.54, exit $28.25, -.29 loss

BEARISH Play Updates

EBAY - Ebay Inc - Company Profile


No specific news. Shares barely declined. Just no interest.

Original Trade Description: October 31st.

eBay Inc. operates e-commerce platforms that connect various buyers and sellers worldwide. Its platforms enable sellers to organize and offer inventory for sale; and buyers to find and buy it virtually anytime and anywhere. The company's Marketplace platforms include its online marketplace at ebay.com and the eBay mobile apps; and StubHub platforms comprise its online ticket platform at stubhub.com and the StubHub mobile apps, which enable fans to purchase tickets to the games, concerts, and theater shows. Its Classifieds platforms include a collection of brands, such as Mobile.de, Kijiji, Gumtree, Marktplaats, eBay Classifieds, and others that offer online classifieds and help people find whatever they are looking for in their local communities. The company platforms enable users to find, buy, sell, and pay for items through various online, mobile, and offline channels, which include retailers, distributors, liquidators, import and export companies, auctioneers, catalog and mail-order companies, classifieds, directories, search engines, commerce participants, shopping channels, and networks. Company description from FinViz.com.

For more than a decade Ebay has been the primary sales hub on the web but as Amazon and others grew, Ebay fell out of favor. There are very few new items left for sale on Ebay because you can buy they cheaper from Walmart, Target or Amazon. That left Ebay to struggle to increase sales on mostly used items.

In Q3 Ebay earnings fell from $545 million and 45 cents to $418 million and 36 cents. For Q4 they expect revenue of $2.36-$2.41 billion and earnings of 52-54 cents. Analysts were expecting $2.4 billion and 54 cents. For the full year, they are now guiding for $1.85-$1.90 and $8.95 to $9.0 billion. Analysts were expecting $1.89 and $8.95. For both Q3 and the full year analysts were expecting more than the Ebay guidance.

Shares fell 18% on the news to $28.61 then rebounded two days later to $29.71. That rebound has faded and EBAY closed at $28.51 on Monday with support well below at $24.

There is just no excitement surrounding EBAY today. Since they spun off PayPal they have been struggling to grow the business. I believe shares will retest the $24 level unless we get a runaway tech rally after the election. I am not holding my breath.

Position 11/1/16:

Short EBAY shares @ $28.51, see portfolio graphic for stop loss.


Long Dec $28 put @ .72, see portfolio graphic for stop loss.

SHLD - Sears Holdings - Company Profile


No specific news. Sears rallied 4% despite the weak market. I lowered the stop loss.

Original Trade Description: October 26th.

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.

Position 10/27/16:

Short SHLD shares @ $10.92, see portfolio graphic for stop loss.

SSYS - Stratasys Ltd - Company Profile


No specific news. Shares fell -2%.

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


Another dead stop at resistance at $36.

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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