Option Investor

Daily Newsletter, Wednesday, 11/16/2016

Table of Contents

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

Market Wrap

A Slowing Rally and A Mixed Day

by Keene Little

Click here to email Keene Little
Tuesday and Wednesday saw a bit of a shift in which indexes were doing well and which were not and that has created some confusion about the market's direction. Opex week continues the tradition of being more bullish than bearish but the rally from November's lows is looking vulnerable to at least a larger correction.

Today's Market Stats

Depending on which index you look at you'll get a different picture about what's happening in the stock market. While the RUT was on fire last week and through Monday it has slowed down and struggled to hold onto its highs. The weaker indexes, such as NDX, have been stronger since Monday's lows but it's not clear if they're seeing a dead cat bounce or the start of something more bullish. The sloshing back and forth of money between sectors and indexes has been strong and this week we're seeing some of that money reverse course. This can be seen with the bonds as well.

Investors have been attempting to get in front of the stampede into stocks that are expected to do better under a Trump administration than the Obama administration. Just one example is in the coal sector, which Obama tried to snuff out. Arch Coal (ARCH) shot up almost $20 (+30%) after the election but has given back about a third of that since Monday's high. Some short covering in the stock and some real buying interest created the spike and now this week we're seeing some profit taking in those that rallied hard since it's recognized that the move might have been a little too much, too fast. From a bearish perspective, some of the indexes, such as the RUT, might be seeing its last hurrah before a much deeper market correction takes hold.

Last week the big-cap tech stocks (think FANG) were crushed as sellers in those high-flyer stocks took their profits and rolled the money over into previously struggling stocks. The small caps (RUT) benefited greatly by the rotation but as mentioned above, it too has slowed as investors decide not to chase those stocks higher right now. From a bigger-picture perspective, it's hard to discern whether the past week's moves have been simply realignment of investment positions prior to another leg up for the broader market or if instead it's part of the scrambling that's done just prior to a major peak for the market.

At previous major market tops, such as in 2000 and 2007, we saw the riskier stocks (techs and small caps) make new highs without the blue chips. It's as if the final buyers, typically retail investors, become convinced that they need to get into these stocks and typically do so at the top (the last of the buyers and then no more to follow). But this time the techs did not participate with the small caps and the Dow Industrials were right there with the RUT. Much of this had to do with specific sectors doing much better, such as the big banks, but the end result leaves a lot of confusion for those who study "normal" market patterns.

Just as this past election was anything but normal, we are finding the same thing in the stock market. Be sure to analyze specific stock/sector/index charts before making a trade since a general market direction is currently providing a mixed message. We have to look at individual charts to try to discern the answer to the question about direction and wait for more price action to see if we get a common answer out of the multiple charts to help us better guess the direction of the broader market (which has a significant impact over time for most stocks).

This morning's economic reports were largely ignored since there weren't any major surprises. The PPI came in less than expected, 0.0% vs. +0.3%, which was a drop from the +0.3% in September. The core PPI for October dropped -0.2% vs. expectations for it to stay at the same +0.2% that was reported for September. No inflation at the producer level helps the Fed in their desire to raise rates, which they've been communicating they want to do next month (and may be forced to do regardless of what happens since their credibility is increasingly on the line). At least for now it would appear they don't have to be worried about inflation.

The bigger worry, in my opinion, is deflation, which is something very few express concern about. But with debt at sky-high levels across the board (governments, corporations and personal) it will be the destruction of debt through bankruptcies and paying down the loans that will create a huge deflationary wave in the coming years. The Fed has to worry about crushing any hopes of an economic recovery with a rate hike but I don't think they have to worry about inflation. Not yet anyway.

With the large move between sectors and indexes in the past week I noticed the S&P 500 index tended to remain somewhat in the middle of it all and remains one of the better market proxies. I'll start off tonight's chart review with its weekly chart.

S&P 500, SPX, Weekly chart

There's a large parallel up-channel that SPX has been trading in since the October 2011 pullback low. The last time it got near the top of the channel was back in late 2014 and all this year it's been trading in the lower portion of the up-channel, which shows general weakness as compared to the early part of the rally from October 2011. This matches the idea that the rally from February is the 5th wave of the rally from 2009 (the October 2011 low would be the 2nd wave pullback correction).

I show the potential for SPX to rally up to the parallel line near the middle of the up-channel (where the April and August highs stopped), which could see SPX hit 2250-2300 by the end of the year. Another possible upside target is 2223, which is the 127% extension of its previous decline (2015-2016) since that's a common target/reversal level. But there is still the possibility that the August high near 2194 was the final high and a back-test of the broken uptrend line from February, near 2189 by the end of the week, will be followed by a bearish kiss goodbye and a strong selloff. I consider the upside from here as very risky while we wait to see if we get a reversal signal.

S&P 500, SPX, Daily chart

The daily chart is a little messy but two things I'd like to point out is last Thursday's back-test of the broken uptrend line from February-June and achievement of a price projection at 2182.28 (with the high at 2182.30). That price projection is where it's possible the rally off the November 4th low completed the c-wave of a large a-b-c bounce pattern off the September 12th low. This is an expanded flat correction in EW terminology since the b-wave (September 22 - November 4 decline) made a lower below the a-wave (August 15 - September 12). The c-wave in this pattern typically achieves 162% of the a-wave, which is the projection to 2182.28. The combination of that achievement and the back-test of the broken uptrend line is what has had me thinking the short side should work. But I'm watching to see if we get another back-test, including a possible test of the August high, before aggressively turning bearish. As shown on the 60-min chart further below, I'd back off on the short side if it rallies above 2190, and especially 2194, and wait to see how it does near 2223 (if reached). Will we more likely see 2175 or 2200 for Friday's settlement number? Who knows, maybe back down to 2150 for a settlement number.

Key Levels for SPX:
- bullish above 2183
- bearish below 2151

S&P 500, SPX, 60-min chart

If SPX pushes higher this week I'll be watching for the possibility it won't get above 2189, which is where it would back-test its broken uptrend line from February and its downtrend line from August 15-23 (not shown on the daily chart above since it's practically coincident with the horizontal line off the August 15th high near 2194). It's also looking like we're completing a 5-wave move up from November 4th (with bearish divergence on MACD helping confirm the wave count). The vulnerability for bulls, from an EW interpretation, is that the leg up from November 4th will complete the 5-wave move up from February, which in turn will complete the 5-wave move up from 2009 (to complete the 2009-2016 cyclical bull market). This is the reason why I'm looking for a MAJOR top for the stock market and it could be within hours/days. At least that's the bearish potential and why I don't like the upside potential vs. downside risk.

Dow Industrials, INDU, Daily chart

The Dow had a strong rally off its November 4th low, which resulted from a big move into stocks that are thought to do well with expected policy changes out of the Trump administration. Stocks like CAT did well since they'll sell more equipment with infrastructure spending. As the US dollar rallied it strengthens international companies like CAT, GE and IBM. The big banks, like GS and JPM, did well as people expect these banks to do better with an assumed rate increase by the Fed next month and since they'll participate in the new loans expected to fund construction projects and international business. Whatever the reasons, the Dow rallied +5.9% into Monday's high while SPX rallied +4.7%. Both are respectable rallies for sure but the Dow's outperformance like that is a little unusual. Too much, too fast? That should be a concern, especially since the VIX collapsed at the same time.

While the Dow currently sits 200 points above its August high at 18668, the same cannot be said about the NYSE advance-decline line. The a-d line is lagging badly, which shows the rally has not been broad-based and that should be very worrisome to bulls. It's the first time in a long time that new highs are not being supported by a new high for the a-d line and that's a strong warning about the possibility a top is being made around here. The higher prices go without a new high in the a-d line the more vulnerable it becomes. The last time a divergence of the same magnitude was seen was at the May 2015 high, which led to a -16% crash into the August 2015 low. The current divergence is also greater than what was seen at the 2007 top. Buyers beware here.

As for the Dow's chart, it has rallied up to a trend line along the highs from November 2015 - August 2016, near today's high at 18910. I see the potential for a rally up to at least the trend line along the highs from April-August 2016, near 19100, but it's not something I'd bet on (too risky). The pattern for the rally from November 4th suggests a drop below last Friday's low near 18737, would signal a top is likely in place. Back below the August high at 18668 would leave a failed breakout attempt and confirmation that either a large pullback is in progress or potentially something much more bearish.

Key Levels for DOW:
- bullish above 18,935
- bearish below 18,668

Nasdaq-100, NDX, Daily chart

As mentioned above, NDX was pummeled last week but has been relatively strong since Monday's low. The bounce into today's high made it up to its broken 20-dma, near 4789, and closed marginally above it. The broken 50-dma is a little higher, near 4811, and then price-level S/R near 4816. It would obviously turn more bullish above its November 10th high near 4856, but the bearish pattern calls the bounce just a correction and will be followed by strong selling.

Key Levels for NDX:
- bullish above 4860
- bearish below 4656

Russell-2000, RUT, Daily chart

The RUT's rally has it approaching the trend line along its highs from April-June-November, currently near 1319, and that's the upside potential I see for this week. It would be bullish above the line (watch for a head-fake break and then failure). But the RUT has stalled and the risk is for a small rolling top (intraday pattern) this week could lead to a strong reversal back down next week.

Key Levels for RUT:
- bullish above 1320
- bearish below 1257

Volatility index, VIX, Daily chart

With the stock market rally we've seen a collapse in the VIX and once again, it looks like a move that's gone too far, too fast. The setup on November 4th, with the tag of its downtrend line from January-June, was for a reversal back down, which had forecasted a stock market rally following the election. Now it's getting close to the uptrend line from August-September, currently near 12.80, and while there's no guarantee it will get there or turn there, the pattern for its decline suggests looking for a reversal back up soon, which makes the uptrend line a great spot to watch closely, especially if it's hit by the end of this opex week.

10-year Yield, TNX, Weekly chart

The other big mover in the past week has been bonds and in fact a much bigger move than has been seen in a long time. Bonds sold off hard, which has driven yields higher and many are claiming this is the kickoff to a longer-term selloff in bonds with the completion of the 30-year bond bull market. I remain unconvinced of that, with my belief that we're in a period of "disinflation" and which will become much more of a deflationary period. But it's hard to argue with the recent move and it's either the middle of what will become a stronger move or it's an overreaction to what many think will drive interest rates higher in the coming year (government spending, inflation, etc.).

The 10-year yield gapped up on Monday, following the strong rally last Wednesday and Thursday (the bond market was closed last Friday) and the week's candle, so far, is a spinning top doji just above the 200-week MA at 2.207%. Watch for the possibility that this week's candle is followed by a red candle next week, which would create a candlestick reversal pattern. That would be especially true if it gaps down next Monday and leaves behind an evening star doji. That's just speculation for now and if bonds continue to sell off this week and next we could see TNX head up to its downtrend line from June 2007 - December 2013 (log price scale).

The one caution we have with the bond market's strong move is that it's another too much, too fast kind of move. Gradually rising rates might not disturb the stock market's rally (one reason why the Fed has been so careful to introduce the idea of slowly raising rates) but a very fast rise in rates, as we've seen, leaves stocks very vulnerable to a more significant correction. The weekly RSI is now more overbought than it's been since its 2013 high, which doesn't mean it will reverse here and now but it's certainly vulnerable to that happening.

KBW Bank index, BKX, Weekly chart

With the big rally week for the banks BKX made it near the top of a broken uptrend line from February, which is a line that's parallel to the uptrend line from June. This shows the similarity between the rallies and with this week's test of the broken uptrend line, near 85.50, there's a good possibility it's topping out here. This week's candle, so far, is a shooting star after tagging resistance as well as achieving a price projection at 84.97 for two equal legs up from February. There's slightly higher potential to the trend line along the highs from April 2010 - July 2015, near 86.50. Monday's high was 85.92.

Transportation Index, TRAN, Weekly chart

The transportation stocks have rallied strong the past two weeks since investors must believe the economy is going to improve under a Trump administration and that that will then help the transportation industry. I have my doubts about that but the market is a little bigger than I am. However, the TRAN has reached a potentially important level for the bounce off its January low. Two equal legs up for a 3-wave bounce correction to the decline off its November 2014 points to 8775, which was achieved yesterday and again today (this morning) but it couldn't hold that level into today's close. The longer-term pattern suggests the TRAN is now ready to resume its decline that started off the November 2014 high. But if the buyers can keep up the pressure and the TRAN can stay above 8775 into next week we could see it head for a new all-time high. That makes it an important inflection point here and we should know over the next few days whether or not the current rally will get reversed.

U.S. Dollar contract, DX, Weekly chart

The US$ has rallied the past two weeks and finally made it up to the top of its sideways consolidation off the March 2015 high. The top of a shallow down-channel is near 100.30 and the dollar climbed above that level yesterday and again today but it's struggling to hold above that level. At this point it's not clear if the dollar is going to turn back down but that's my expectation. The pattern of the rally from May suggests it will remain inside the consolidation range and one more leg down into early next year would do a nice job setting it up for the next rally leg (above 105).

Gold continuous contract, GC, Daily chart

The dollar's rally has put some downward pressure on the commodities sector but more so for the metals. The metals have been in decline since topping back in July and gold's bounce off the October 7th low resulted in a back-test of failed support at 1308 in the beginning of the month. That was quickly followed by a bearish kiss goodbye and strong selloff into Monday's low and below its October 7th low. The back-test of support-turned resistance at 1308 was a classic setup for the bears. The bounce off Monday's low looks like a bear flag consolidation pattern and I expect gold to head lower to potentially stronger support at either its May 31st low at 1199 or price-level support near 1180, which goes back to lows in 2013 that acted as support until the breakdown and back-test in 2015. Gold then rallied back above 1180 in February so a drop back below that level would be more bearish for gold.

Oil continuous contract, CL, Daily chart

In last week's update on oil I had mentioned the leg down from October 19th looked close to completion and should set up a bounce correction before heading lower. The bounce off Monday's low looks to be that correction and while I'm showing a higher bounce into next week on my chart it's not required. At the moment it's struggling with its downtrend line from June-August, which it broke above at the end of September and then dropped back below on November 2nd. The back-test of that trend line could be followed by a bearish kiss goodbye from here. But a little higher it would back-test its broken 20- and 50-dma's, both near 47, which would also be a 50% retracement of its October-November decline. It could make it up to its broken uptrend line from August-September, near 47.80 by mid-week next week, or maybe even up to the 62% retracement of its decline at 48.21. But it has retraced 38%, at 45.92, and therefore the minimum expected bounce correction has now been met.

Economic reports

Thursday's economic numbers include the CPI numbers, which are expected to have ticked up from the September reading. Another zero or negative number might get some analysts mumbling something about "disinflation." Some housing numbers are not expected to change much but I noticed the home builders are struggling so the numbers could come in weaker than expected, which might cause the Fed to pause and at least think about whether or not it would be wise to raise rates. But then again I've never been accused of calling them the sharpest knives in the drawer.


For the past week, since the election results, we've seen a strong rotation out of some previously strong sectors into previously weak ones. But the quick rotation can actually be considered a sign of instability in the stock market and in the past week we had a few signs of trouble. I mentioned the deteriorating advance-decline line and in addition to that we had a cluster of Hindenburg Omen and Titanic Syndrome signals. As indexes test resistance we saw new highs and new lows last Friday each at 60-day peaks and the last time that happened was back in June 2008. The rest of that year was not kind to bulls who stubbornly held onto their long positions.

None of this says the rally will reverse here and now but they are additional warning signals and with some indicators pointing to the same conditions as we saw at previous important highs (2007, 2015) I think it's important to understand the risk here. Upside potential is once again dwarfed by downside risk and holding long positions overnight could be very risky. It goes without saying that holding short is risky, especially without any kind of confirmation that the market has topped. But the setups on several indexes have me nibbling on the short side (put options, risk it all, no stops) and I think we'll know by this time next week whether or not the market will turn down or possibly hold up into at least Thanksgiving next week (holiday-shortened weeks tend to be bullish). Trade carefully over the next several days.

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

Bank Rally

by Jim Brown

Click here to email Jim Brown
Editor's Note

The banking sector has been on fire but it cooled over the last couple days. Is now the time to strike? There is a lot of big money flowing into the sector on expectations for higher interest rates and a stronger economy.


XLF - Financial SPDR ETF - ETF Profile

The Financial Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Financial Select Sector Index.

The ETF is comprised of 44% banks, 20% capital markets, 19% insurance, 11% diversified financial services and 6% consumer finance.

All of those sectors will do better as rates rise. As of today the CME FedWatch Tool shows a 91% chance of a rate hike in December as well as a 91% chance for the February meeting and 92% for March. If they do hike in December the odds will decline for February but depending on their commentary the March meeting will still be on the table. Multiple Fedwatchers have speculated there could be 3-4 rate hikes in 2017 if the economy continues to improve.

The Fed has to hike rates in 2017 in order to have some room to maneuver if the business cycle rolls over and a recession appears. We are in the third longest expansion in history and we are due for another recession soon.

The banks rallied on the rise in treasury yields and the expectations for the December rate hike as well as the potential for decreased regulation. President elect Trump has said he would kill regulations harming the banking industry. There is even talk of modifying Dodd-Frank.

Banks have rallied significantly and I would not suggest buying the actual ETF after the big gain. However, I do not believe the gains are over. The gains last week spiked the ETF to a 7-year high but the 2007 highs were over $30.

On Tuesday somebody bought 300,000 contracts of the March $23 call at an average of 55 cents. That was $16.5 million in option premiums. That takes some serious conviction. I am recommending we follow them and buy the same call option. That way our risk is limited to $50 per contract. I am willing to bet $50 that the ETF will be over $23 by March. This is a long term position and there will not be a stop loss.

Buy March $23 call, currently 52 cents. No stop loss.


No New Bearish Plays

In Play Updates and Reviews

Fractional Gain

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 200 gained only a nickel but it was enough to keep the new high streak alive. The Dow finally closed with a loss to end its streak but the positive trend is still intact. We knew there would be profit taking after such large gains and so far, it has been minimal.

The Nasdaq posted another decent gain to pull within 45 points of a new high. I would be perfectly happy to have the indexes continue to chop around at these levels with a positive bias. Eventually the next round of buyers will get tired of waiting and begin to nibble at the lows. If the S&P breaks over 2,190 to make a new high the race higher would begin.

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

GNC - GNC Holdings
Long stock position was entered at the open.

EBAY - Ebay Inc
The long put position was stopped at $28.85.

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

FTK - Flotek - Company Profile


No specific news. Shares declined slightly on the drop in oil prices.

Original Trade Description: November 12th.

Flotek Industries, Inc. develops and supplies oilfield products, services, and equipment to the oil, gas, and mining industries in the United States and internationally. The company's Energy Chemistry Technologies segment designs, develops, manufactures, packages, and markets chemistries under the Complex nano-Fluid brand for use in oil and gas well drilling, cementing, completion, stimulation, and production activities, as well as for use in enhanced and improved oil recovery markets. This segment also constructs and manages automated material handling facilities; and manages loading facilities and blending operations for oilfield services companies. The company's Drilling Technologies segment inspects, manufactures, sells, markets, and rents down-hole drilling equipment that are used in energy, mining, and industrial drilling activities through direct and agent-based sales. Company description from FinViz.com.

In the Q3 cycle they reported a loss of 5 cents on revenue of $73.7 million. That was slightly more than the estimates for a 3-cent loss. Revenue estimates were for $79.5 million. The company explained their 16.2% decline in revenue saying there was a 43.2% reduction in the active rig count in Q3 compared to Q3-2015. In other words, their available business was cut nearly in half but they only recorded a 16% decline in revenue. That was actually a 1.0% increase sequentially from Q2.

Flotek services oil wells and especially new wells with their down hole products including their patented Complex nano-Fluid (CnF) technology that is used in fracking wells. Unlike fracking chemicals used by others, the Flotek CnF chemicals are completely non-toxic and have been proven to provide a slippery surface in the reservoir so that oil flows freely. This nontoxic chemical mix made from citrus oils is seen as a plus for producers constantly under fire for potential ground water contamination.

With rigs going back to work and drilled but uncompleted wells being brought online, the company said they were seeing signs of recovery in the sector. The drop in crude prices to $43 last week failed to depress the stock.

FTK has put in a bottom at $11 and could be ready to move towards the September highs at $16.

If OPEC actually announces some kind of production agreement on Nov 30th, the sector could respond aggressively.

Earnings Feb 1st.

Position 11/14/16:

Long FTK shares @ $11.72, see portfolio graphic for stop loss.

No options recommended because of price.

GNC - GNC Holdings - Company Profile


No specific news. Only a fractional 3 cent decline.

Original Trade Description: November 15th.

GNC Holdings, Inc., operates as a specialty retailer of health, wellness, and performance products. The company operates through three segments: Retail, Franchise, and Manufacturing/Wholesale. Its products include vitamins, minerals, and herbal supplement products; and sports nutrition products, diet products, and other wellness products. The company sells its products under the GNC proprietary brands, including Mega Men, Ultra Mega, Total Lean, Pro Performance, Pro Performance AMP, Beyond Raw, GNC Puredge, GNC GenetixHD, and Herbal Plus, as well as under third-party brands. It operates a network of approximately 9,000 locations under the GNC brand worldwide. The company sells its products through company-owned retail stores; Websites, including GNC.com and LuckyVitamin.com, as well as Drugstore.com; domestic and international franchise activities; third-party contract manufacturing; and e-commerce and corporate partnerships. Company description from FinViz.com.

Just over a month ago there was a contingent of Chinese buyers circling GNC when it had a market cap of about $4 billion. When they reported earnings and lowered guidance that market cap fell to about $1 billion. Shares fell from $22 to $13 making the company even more attractive for the Chinese buyers.

The key here is not the U.S. or European business. The key point in a Chinese acquisition is the health conscious Chinese consumer. In China there are plenty of health products but most are scams or poorly processed with large amounts of unknown fillers. The health food and vitamin market is not well managed and all sorts of scary products exist.

GNC as a global brand is the answer. Chinese consumers would feel comfortable buying the brand and knowing there were no harmful ingredients.

Over the last several days, GNC shares have started ticking up again. GNC has hired Goldman Sachs to find a buyer and it is only a matter of time before that happens. The uptick in the shares could be due to rumors leaking out about a potential transaction. Option prices have also escalated suggesting something in progress.

Earnings Jan 26th.

Position 11/16/16:

Long GNC shares @ $14.75, see portfolio graphic for stop loss.

No options recommended because of price.

IDTI - Integrated Device Technology - Company Profile


No specific news. Nice gain to extend the move over prior resistance.

Original Trade Description: November 14th.

Integrated Device Technology, Inc. designs, develops, manufactures, and markets a range of semiconductor solutions for the communications, computing, consumer, automotive, and industrial end-markets worldwide. It operates in two segments, Communications; and Computing, Consumer, and Industrial. The Communications segment offers communication timing products, such as clocks and timing solutions; flow-control management devices comprising Serial RapidIO switching solutions; multi-port products; telecommunications products; static random access memory products; first in and first out memories; digital logic products; radio frequency products; and frequency control solutions. The Computing, Consumer, and Industrial segment provides clock generation and distribution products, programmable timing devices, computing timing solutions, high-performance server memory interfaces, PCI Express switching solutions, power management solutions, and signal integrity products, as well as sensing products for mobile, automotive, and industrial solutions. Company description from FinViz.com.

IDTI reported earnings of 34 cents that beat estimates for 33 cents. Revenue of $184.1 million barely edged ahead of estimates for $184.0 million. Revenue rose 8% making the 12th consecutive quarter of revenue growth.

They announced multiple new products for the quarter including a new 5G product in corporation with IBM for the connected car. They also obtained certification for their second production facility for automotive capabilities.

Earnings Jan 30th.

Shares spiked from $21 to $24 on the earnings then settled in for two weeks of post earnings depression. Over the last two days shares has ticked higher again and closed at $23.60 on Monday. This has been resistance from early October and from back in June. With the positive earnings and a positive market I expect the stock to breakout this time.

Position 11/15/16:

Long IDTI shares @ $23.69, see portfolio graphic for stop loss.

No options recommended because of price.

BEARISH Play Updates

EBAY - Ebay Inc - Company Profile


No specific news. Shares spiked at the open to $28.89 to stop us out at $28.85 and then rolled over to close at the low for the day.

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:

Closed 11/16/16: Long Dec $28 put @ .72, exit .50, -.22 loss.

Previously closed 11/10/16: Short EBAY shares @ $28.51, exit $28.75, -.24 loss.

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 done 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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