Option Investor

Daily Newsletter, Wednesday, 11/30/2016

Table of Contents

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

Market Wrap

Bulls Struggling to Hold Back the Bears

by Keene Little

Click here to email Keene Little
Last week's Thanksgiving rally resulted in new weekly closing highs for many indexes but this week has been a struggle to hold those gains (the Dow is doing better with its new highs). So far the pullback can be considered just a correction to the rally but the bears have other ideas and the bulls are struggling to hold them back.

Today's Market Stats

After an especially strong rally following the election it's natural to see the market taking a breather with some profit taking this week. Whether that profit taking will turn into stronger selling is the big question but at the moment the pullback is looking like a correction to the rally and not something more bearish. Of course the definition of "more bearish" will be different for different traders depending on their risk tolerance and whether they bought at the beginning of November or last week. Even a "normal" (is there such a thing in this market?) 38% retracement of the November rally would see SPX drop down to 2164 but if you bought above 2194 that would be a painful "correction."

While we don't yet know what kind of pullback to expect, or how deep it might go, there are some signs that we have not yet seen the high for the rally from November 4th. But at the same time there are some reasons to believe the top could be in place and considering the downside risk in this overstretched market to the upside I think it's prudent to be lightly exposed to the long side while waiting to see if the bears are going to mount some kind of sustained attack. Those clues will come with additional price action in the coming week.

This morning started off with a pop to the upside but that was quickly sold into and the market struggled for the rest of the day. A final sell program just before the close had most of the indexes at/near their lows of the day, which of course left it looking more bearish. But in the land of reversals of reversals I find it very difficult to predict the next day based on how the market closed the previous day. It's kind of a schizoid market.

This morning's economic reports included the ADP Employment Change for November, which came in stronger than expected at +216K. That was significantly above the +119K in October and beat the +160K that the market expected.

Other positive numbers for the market were Personal Income, which increased +0.6% in October and was better than the +0.4% for September and better than expectations for +0.4%. Spending declined some in October (+0.3% vs. +0.7% in September) so that hurt retailers but paying down some debt is a good thing.

Equity futures had been rising last night before this morning's economic reports, which boosted futures a little higher, so the market started off with a gap up. But as already mentioned, the sellers immediately hit the gap up with selling, using the extra liquidity to sell into.

It was not a day of hard selling but each bounce attempt was hit with more selling and to a lower low for the day before another bounce attempt. The resulting pattern for the day was a choppy pullback with overlapping highs and lows and that's what has it looking like a correction to the rally. But the bearish interpretation is that the day stair-stepped lower in the beginning stage of a waterfall decline. If the selling starts to accelerate on Thursday it would be a stronger sign that we might have seen the highs in the market, at least for now. There are of course some key levels to watch on the charts to help determine whether it's a pullback to buy or if instead we'll want to start looking at bounces to short. At the moment it looks like it's a pullback that will lead to another push higher but I can't say I'm confident enough in that to actually buy. I think downside risk dwarfs upside potential.

Today was another day with mixed signals, especially this morning when the Dow was up near 100 points while the techs were getting beat down. SPX and RUT were in neutral territory and the fractured state of the market is always a good time to sit back and watch for a while. The dollar was up but oil was up stronger and the strength in the banks certainly helped the blue chips. But Treasury yields also spiked back up and at some point that's going to be a drag on stocks. But short term, the selling in bonds (driving yields higher) has helped fuel the rally in stocks.

Starting off tonight's chart review will be a little more detailed look at some interesting price relationships for SPX and a little further below I'll tie in some time relationships as well. Many market analysts, particularly followers of Gann, believe time (time cycles, Fib relationships, etc.) is more important than price so I think it's a good idea to try to tie the two together. I'll run through a few charts for SPX, starting with the monthly chart, to point out some of the price and time relationships in order to highlight the importance of where we are currently. None of this means the market is getting ready to reverse back down but it does provide enough clues as to why it could do so soon (possibly within days if it hasn't already peaked).

S&P 500, SPX, Monthly chart

The monthly chart shows the rally off the 2009 low and a potentially important price projection at 2213.50, which was tested with last Friday's high near 2213 and again today with this morning's high near 2214 (both of which straddle the 2213.50 projection). If I break the rally into two pieces, the first being the February 2009 - May 2011 leg up and the second being the October 2011 - present leg up, the 2nd leg is 162% of the 1st leg at 2213.50. There is a significant monthly bearish divergence at the current high vs. the lower price highs in 2014-2015. Only in hindsight will we know if the current high is important but the potential is for it to be THE high, although there's plenty the bears need to do to prove it (and so far this week they're doing a poor job of it).

S&P 500, SPX, Weekly chart

The weekly chart below shows a couple of the price relationships for the rally from February, starting with the projection shown in red at 2223, which is the 127% extension of the previous decline (the May 2015 - February 2016 pullback). As I'll show on the daily chart further below, this same 127% extension shows up on a shorter time frame and is essentially a fractal pattern of what we see on the weekly chart. If SPX can rally above 2223 it would be a bullish signal that points to 2250-2300 as an upside target zone.

The next relationship is in the rally pattern from February, which I'm counting as a 5-wave move and as such should be completing soon, if not already completed. The 3rd wave up (June-August) is slightly more than 62% of the 1st wave up (February-April), which is the projection shown at 2177.67. These projections make the chart look messy but they could be important, which is why I'm showing them on the chart. The 5th wave (the rally from November 4th) also reached slightly more than 62% of the 3rd wave, which is the projection shown at 2208.74. The November rally also has SPX back-testing its broken uptrend line from February-June and now the bears are waiting to see if it will be followed by a bearish kiss goodbye. Not shown on the chart, the 2nd and 4th wave pullback corrections (April-June and August-November) were about equal in price while the 4th wave was about 127% longer than the 2nd wave, which made the November low ripe for the start of the next rally. Now we have the 5th wave ripe for a reversal back down. While there's clearly further upside potential, even if only to 2223, I think that's now a riskier bet than the short side.

S&P 500, SPX, Daily chart with price relationship

Notice on the weekly chart above the 3-wave pullback from May 2015 to February 2016 and the 127% extension up to 2223. Now look at the daily chart below and you'll see the same 3-wave pullback from August to November and now the same 127% extension of that pullback also points to 2223. That makes 2223 a particularly interesting number to watch if reached. SPX is now struggling to hold onto the broken/recovered uptrend line from February-June when viewing it with the arithmetic price scale, which puts the uptrend line slightly lower than when using the log price scale as shown on the weekly chart. Today's close is back below the trend line so the bulls want to see that recovered quickly, which case the upside target at 2223 would look more likely. But a drop below the August high near 2194 would be the first sign of trouble for the bulls and then below the November 10th high at 2182 would signal the top is likely in place.

Key Levels for SPX:
- stay bullish above 2194
- bearish below 2182

S&P 500, SPX, Daily chart with time relationships

The next daily chart shows some time relationships in the price pattern since the August 2015 low. For whatever reason, there is a 50-day time period that has been repeating, with only a little hiccup in the April-September 2016 period which stretched 2 x 50 = 100 days and then the last 50-day period completed last Friday. Again, only in hindsight will we know if that high was significant but it has the potential to be a significant turning point based on time cycles. Achieving an important price level (the 162% projection to 2213.50 shown on the monthly chart) on this 50-day cycle date is what makes it possible we have a price/time relationship that will mark an important high for the market, even if it will only lead to a stronger pullback before heading higher again.

We'll soon find out if time and price have come together for a significant change in the market. There is a Fib price relationship between the two legs of the rally from 2009 where the 2nd leg (the rally from October 2011) is 162% of the 1st leg at 2203. Tuesday's closing price was near 2204 but the more important closing price will be this week's. Last week's closing price, which was Friday's half-day session high, was 2213. Last week's low was near 2186 and that's an important level for the bulls to defend this week (for other reasons as well, which I outline below.

There are a few time/price relationships based on the Gann Square of Nine chart (it's a little hard to follow without the chart but please bear with me as I try to describe the relationships and bullet #5 hopefully sums it up):

1. 2190 is square (90 degrees) to February 11, the low of this year, and therefore an important level that should now act as support (bearish if it doesn't)

2. 2207 is square to July 20, which in 2015 was the date of the test of the May 2015 high that then led to a strong selloff into August. Tuesday's close was 2204, which is square to January 20, which was the low this year prior to the February low.

3. There's symmetry in price with the March 2009 low, which had undercut the prior low in November 2008 by 75 SPX points. The same 75 points above the May 2015 high near 2135 equals 2210, which was exceeded by only 3 points with last Friday's high at 2213. But that half-day session high was quickly followed by this week's pullback. This morning's high at 2214 was quickly sold into.

4. We're now approaching December 7th, which is opposite 666-667 (the 2009 low).

5. December 1 is aligned with 2182, which is the November 10th high and November 10 is aligned with 2194, which is the August 2016 high. There is therefore "vibration" between these dates and price levels and along with #1 above, we have 2190-2194 and December 1-7 as a potentially important price/time relationship. A weekly close below 2190 would likely be a bearish signal and below the November 10th high at 2182 would be a sell signal from an EW pattern perspective.

Dow Industrials, INDU, Daily chart

The Dow has been outperforming the other indexes, thanks largely to the banks' outperformance this month. After struggling near its broken uptrend line from February-June in early November the Dow then climbed back above the trend line last week and used it for support on Tuesday. This is all bullish price action and today's new all-time high continues to support the idea for higher prices (although the bearish divergence showing up on the chart urges caution by those chasing it higher, as well as today's shooting star at trendline resistance).

There's an upside target near 19350, only about 125 points above this morning's high, where it would run into the trend line along the highs from April-July. Above that is a price projection at 19503 where the leg up from November 18th would be 62% of the November 7-14 rally. There's an EW pattern that supports that projection and while it would be more bullish above 19350 I'd be very careful if the bearish divergences are not negated. From a risk perspective for bears to consider, there is the possibility that the Dow could continue a rally up to the price projection at 19904 (let's call it 20K) and while I don't think we'll see that, it would obviously be painful if you're stubbornly holding onto a short position. The same goes for the bulls here -- with the potential for an important high here, consider where you want your stop so as to protect profits while giving the rally some room to breathe before heading higher.

Key Levels for DOW:
- bullish above 19,350
- bearish below 18,853

Nasdaq-100, NDX, Daily chart

The techs were weak again today as they struggle to keep up with the blue chips and the RUT, all making new highs while NDX managed to only test its October highs with a lower high so far. Today's sharp decline followed another back-test yesterday of the trend line across the highs from July-November 2015, which held the NDX down in September and October. That trend line is nearing 4900 so it would be at least short-term bullish above 4900 but it might be just the final leg of a rising wedge pattern off the November 4th low (depicted on the daily chart below and shown in more detail on the 60-min chart further below). A choppy rally up to about 4930 is the potential I currently see for NDX into next week. But if it breaks down much further, below 4493 (the 20-dma), I would have a hard time justifying a reason to expect higher prices. Today's low at 4810 met a downside projection I have for an a-b-c pullback off the November 22nd high and it's a setup for another rally leg. That possibility requires an immediate rally on Thursday. Price-level support near 4816 (the March 2000 high) is also being tested again. Again, the bulls need to prove the bullish setup (even if for only one more leg up) with an immediate rally on Thursday otherwise it will start to look more bearish.

Key Levels for NDX:
- bullish above 4930
- bearish below 4793

Nasdaq-100, NDX, 60-min chart

A closer view of the NDX price action off its November 4th low shows just a 3-wave bounce and as such it could be a correction to the October decline and the decline off Tuesday's high is just the start of a much more serious decline. But the a-b-c pullback off the November 22nd high has a projection for the c-wave at 4812, which was achieved with the sell program into today's close. A 38% retracement of the rally from November 14th is near 4805 and that's why I think it would be more bearish below 4805, having already broken below the 4812 projection at that point. But as I said, an immediate rally Thursday morning would keep the rising wedge alive, which calls for one more leg up into next week, potentially topping out around 4930 before declining into year-end.

Russell-2000, RUT, Daily chart

The November rally for the RUT took it up to a trend line along the highs from July-September, currently near 1352, which is parallel to the uptrend line from February-November. About 15 points higher, currently near 1367, is a parallel line attached to the April high, and that's the upside potential if the rally from November 3rd is not done yet (the line will be near 1375 by the end of next week). The pullback from last Friday looks corrective and while it's still too early to tell whether or not THE high is in place, the risk for those holding long positions is that we're going to see the start of a large decline following the 5th wave of the move up from February. Upside potential is dwarfed by downside risk and I would not want to be holding long positions below the November 14th high near 1306. Nor would I want to be short above last Friday's high at 1347. Mind the chop in between.

Key Levels for RUT:
- bullish above 1348
- bearish below 1305

20+ Year Treasury ETF, TLT, Weekly chart

Just as the stock market has rallied a little too far too fast to be healthy, the bond market has sold off strong and should be ready for at least a breather. The TLT weekly chart below shows it might be ready for at least a bounce since it has now sold off the same amount as it did in early 2015, at 120. In addition to that potential price-support level the 200-week MA is currently at 120.17 and today's close was 120.24. It's building some bullish divergences on the daily chart and could be forming a basing pattern over the past week. It's not a bad place to nibble on a long position in TLT but keep in mind that downside potential to its uptrend line from 2011-2013, currently near 116.40 (log price scale).

KBW Bank index, BKX, Daily chart

The banks continue to act strong and after just one down day on Tuesday it gapped up and continued to new highs today. But it's possible it was a last gasp before at least a larger pullback since it's showing bearish divergence as it presses up against the trend line along the highs from 2010-2015 and the top of a parallel up-channel from February (the broken uptrend line from February-May). When viewing the chart with the log price scale the trend line along the highs from 2010-2015 is a little higher, near 88. Today's high was 87.56. If BKX is going to make it higher into December I think it will stair-step higher as shown in green but at the moment it's vulnerable to a stronger pullback/decline.

U.S. Dollar contract, DX, Weekly chart

The US$ has been consolidating for the past week and it looks like it could press higher (perhaps something like depicted with the light-green dashed line on its weekly chart below). The dollar stays bullish above price-level S/R at 100.50 but the daily chart is showing bearish divergence and I'm thinking it's ready for at least a larger pullback before potentially heading higher.

Gold continuous contract, GC, Weekly chart

Gold is fighting to hold onto price-level support near 1180 but today's decline had is closing below that level for the first time since February. I think there's a good chance it will be supported by the midline of a down-channel from 2011 (the blue dotted downtrend line on the weekly chart below). This line stopped rallies in 2014 and then acted as support in 2016. Currently near 1165 it was nearly tested with today's low. Much below 1165 would have it looking more immediately bearish but if we get a bounce correction to the decline (potentially something more bullish) I'll be looking for a bounce back up to the soon-to-cross 50- and 20-dma's, perhaps near 1260, before heading lower (if the larger bearish wave pattern is correct and we really are going to suffer from deflation instead of inflation, which I believe is the greater likelihood).

Oil continuous contract, CL, Daily chart

Oil shot back up during the early-morning hours as news was released that OPEC would be able to hold down production to support higher prices. Russia said it would agree to a production cut, the first time it has joined OPEC since 2001. Total production cuts would amount to about 1.8M bpd, about 2% of world-wide production. The agreement allows Iran to raise its production. Only time will tell if the agreement means anything since rarely has it held back production. Helping the rally was this morning's report on U.S. inventory, which showed a drop of 884K barrels as opposed to expectations for a drop of 636K barrels.

As for the price pattern, oil has been consolidating in what could be a bullish ascending triangle since June and while it could break out from here, with a rally above 52, we might see it consolidate into January before starting the next rally. But it's not clear yet which way it is likely to go from here and if the current bounce off the November 14th low does not make it higher than the October 19th high at 51.93 and then drops below the November 14th low at 42.20 it would trigger a stronger sell signal.

Economic reports

Tomorrow morning we'll get some more employment data with the Challenger Job Cuts and the unemployment claims data, none of which should move the market. The Construction Spending report and the ISM Index report will both come out at 10:00 and could cause a little movement around the release of those numbers. The auto and truck sales numbers will be out in the afternoon. Friday's reports include the nonfarm payrolls numbers and unless there's a big (disappointing) surprise there should not be much market movement. Only if it's disappointingly low would it have the market wondering if pricing in a Fed rate increase was correct.

I'm still not convinced the Fed will raise rates although I think there's a better than even chance it will happen. They've been boxed into a corner by both the stock and bond markets and they'd lose a lot more credibility, which is already in short supply, if they don't follow through on a rate increase. Whether or not a rate increase would be a wise move will be argued later (and I suspect they'll be blamed for the economic slowdown in the coming years).


The stock market has been on a tear since the election and there could be more rally before it peters out. But the slowing momentum and bearish divergences as indexes push up against resistance suggest at least caution is required by the bulls. Whether we get just a larger pullback or something more bearish is not clear yet but the risk for those holding long positions is that the wave count for the rally from February can now be considered complete at any time. It doesn't guarantee a reversal from here but I think the risk is now in long positions. Upside potential is dwarfed by downside risk.

Nibbling on some short positions should be a strong consideration if you want to hedge a long portfolio. Speculators (traders) should nibble very carefully on short positions but don't hang around with new highs since there is still plenty of upside potential, especially if the market is in the middle of a blow-off rally into the end of the year (not a prediction but just trying to recognize the risk).

The pullback from last Friday looks corrective and some indexes are making new highs this week, both of which support the idea that the market could continue to press higher, possibly in a choppy move that will frustrate both sides with how long it takes. But with the price/time relationships that I reviewed with the SPX charts, I think the potential for a stronger reversal back down needs to be respected. We should get much needed evidence in the coming week.

Keep in mind that the stock market often pulls back into mid-December before setting up the Santa Claus rally. Trade carefully.

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

Railroads Are Healthy

by Jim Brown

Click here to email Jim Brown
Editor's Note

Despite some rough times during the energy decline the railroad sector is healthy. The need for railcars has not gone away but it did moderate over the last two years. With the OPEC decision to raise prices, the energy sector is going to heal and that means higher demand for railcars.


TRN - Trinity Industries - Company Profile

Trinity Industries, Inc. provides various products and services for the energy, transportation, chemical, and construction sectors in the United States and internationally. Its Rail Group segment offers railcars, including autorack, box, covered hopper, gondola, intermodal, tank, and open hopper cars; and couplers, axles, and other equipment, as well as railcar maintenance services. This segment serves railroads, leasing companies, and industrial shippers of various products. The company's Railcar Leasing and Management Services Group segment leases tank and freight railcars to industrial shippers and railroads; and provides management, maintenance, and administrative services. As of December 31, 2015, this segment had a fleet of 76,765 owned or leased railcars. Its Construction Products Group segment offers highway products, such as guardrail, crash cushions, and other protective barriers; aggregates, including expanded shale and clay, crushed stone, sand and gravel, asphalt rock, and other products, as well as other steel products for infrastructure-related projects; and trench shields and shoring products for the construction industry. This segment offers aggregates to concrete producers; commercial, residential, and highway contractors; manufacturers of masonry products; and state and local municipalities. The company's Energy Equipment Group segment manufactures structural wind towers; utility steel structures for electricity transmission and distribution; storage and distribution containers; cryogenic tanks; and tank heads for pressure and non-pressure vessels. Its Inland Barge Group segment provides deck barges, and open or covered hopper barges to transport grain, coal, and aggregates; and tank barges to transport chemicals and various petroleum products, as well as fiberglass reinforced lift covers for grain barges. Company description from FinViz.com.

Trinity reported earnings of 56 cents that beat estimates for 52 cents. Revenue was $1.11 billion. They guided for full year earnings of $2.10-$2.20 per share. They currently have a trailing PE of only 8.94. Liquidity is currently over $2 billion.

They booked orders for 1,260 railcars in the quarter. Their order backlog is $3.7 billion representing orders for 34,870 railcars. The inland barge segment has an order backlog of $177.3 million. The order backlog for wind towers was over $1.0 billion.

Earnings Jan 25th.

Trinity has a good business. They have received fewer orders because of the energy slowdown but they have plenty of backorders to work through as the energy sector rebounds.

Shares rose nearly $1 today in a weak market and are holding right at 52-week resistance at $28. A breakout here could run to $35.

With a TRN trade at $28.25

Buy TRN shares, initial stop loss $25.85.

Optional: Buy Jan $30 call, currently 60 cents.

BOJA - Bojangles Inc - Company Profile


Shares dropped with the market to stop us out. I am adding the position back in with an entry trigger at $18.65.

Original Trade Description: November 28th.

Bojangles', Inc. operates and franchises limited service restaurants in the United States. Its restaurants serve chicken items, made-from-scratch buttermilk biscuits, flavorful fixin's, and iced tea. As of September 25, 2016, the company had 699 system-wide restaurants, including 301 company-operated and 398 franchised restaurants primarily located in the Southeastern United States. Bojangles', Inc. was founded in 1977. Company description from FinViz.com.

In early November they reported earnings of 25 cents that beat estimates for 21 cents. Revenue of $133.2 million missed estimates by only $200,000. They guided for the full year to earnings of 92-95 cents and revenue of $530.5-$533.5 million.

Earnings February 2nd.

Shares spiked $1.50 on the earnings and continued to make solid progress until today's minor bout of profit taking. However, after the bell they announced that certain existing shareholders had filed to sell six million shares in an underwritten public offering. Nearly every broker on the street is participating in the offering so there will not be a problem selling the shares. The company will receive none of the proceeds with everything going to the shareholders.

Shares fell to $18.30 in afterhours after closing at $19.70. Typically, when a company gets hit on a secondary, it rebounds almost immediately to the original price unless the shares are sold significantly under the market, which is not expected in this case.

On Wednesday shares dropped with the market to stop us out. I still believe the company will set a new high once the secondary is priced.

With a BOJA trade at $18.65

Buy BOJA shares, initial stop loss $17.45

No options recommended because of wide spreads.


No New Bearish Plays

In Play Updates and Reviews

Patience Pays

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets opened at new highs but the hang time was brief. The Dow gave up a triple digit gain and the Nasdaq indexes closed deep in negative territory. We did not add any new positions last night because I was worried there could be more profit taking ahead. If we had entered a new long position, it would have been filled at the high of the day and closed at the low of the day. Sometimes, patience pays.

Unfortunately, the market decline knocked us out of three of out six positions. I am reinstating Bojangles and looking for a rebound. The market weakness may not be over yet because I am sure a lot of traders were caught leaning the wrong way today.

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

BOJA - Bojangles
The long stock position was stopped with a trade at $17.85. Reload!

GNC - GNC Holdings
The long stock position was stopped with a trade at $14.25.

IDTI - Integrated Device
The long stock position was stopped with a trade at $24.65.

UIS - Unisys
The long stock position was opened with a trade at $15.25.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

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BULLISH Play Updates

BOJA - Bojangles Inc - Company Profile


No specific news. Shares dropped with the market to stop us out. I am adding the position back in with an entry trigger at $18.65.

Original Trade Description: November 28th.

Bojangles', Inc. operates and franchises limited service restaurants in the United States. Its restaurants serve chicken items, made-from-scratch buttermilk biscuits, flavorful fixin's, and iced tea. As of September 25, 2016, the company had 699 system-wide restaurants, including 301 company-operated and 398 franchised restaurants primarily located in the Southeastern United States. Bojangles', Inc. was founded in 1977. Company description from FinViz.com.

In early November they reported earnings of 25 cents that beat estimates for 21 cents. Revenue of $133.2 million missed estimates by only $200,000. They guided for the full year to earnings of 92-95 cents and revenue of $530.5-$533.5 million.

Earnings February 2nd.

Shares spiked $1.50 on the earnings and continued to make solid progress until today's minor bout of profit taking. However, after the bell they announced that certain existing shareholders had filed to sell six million shares in an underwritten public offering. Nearly every broker on the street is participating in the offering so there will not be a problem selling the shares. The company will receive none of the proceeds with everything going to the shareholders.

Shares fell to $18.30 in afterhours after closing at $19.70. Typically, when a company gets hit on a secondary, it rebounds almost immediately to the original price unless the shares are sold significantly under the market, which is not expected in this case.

I am proposing we try to buy the shares at the open on Tuesday. If there is any additional decline at the open to support at $18 or so, that would be a $2 discount to where they traded on Friday.

Position 11/29/16:

Closed 11/30/16: Long BOJA shares @ $18.05, exit $17.85, -.20 loss.

GNC - GNC Holdings - Company Profile


No specific news. Fell below support in a weak market to stop us out.

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:

Closed 11/30/16: Long GNC shares @ $14.75, exit $14.25, -0.50 loss.

IDTI - Integrated Device Technology - Company Profile


No specific news. Big 7% decline in a weak market to stop us out.

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:

Closed 11/30/16: Long IDTI shares @ $23.69, exit $24.65, +.96 gain.

UIS - Unisys Corp - Company Profile


No specific news. Shares ticked up to $15.30 to trigger our entry into the position before fading with the market.

Original Trade Description: November 26th.

Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segment's product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. Company description from FinViz.com.

The information technology sector is undergoing a transformation and older companies are becoming renewed as they change focus to the new cloud services offerings. Unisys was founded in 1886 making it 130 years old. You can imagine how many times they have changed products and focus over that period.

The company is focusing on cloud-based products and software as a service. They also offer physical security for data centers both physical security and software security. They offer a broad range of outsourcing services for building managers and clients. They have been selling their noncore assets and focusing their skills to build specialized capabilities to win industry specific projects.

They reported adjusted earnings of 41 cents compared to estimates for 29 cents. Revenue of $683.3 million beat estimates for $664 million.

Earnings Jan 24th.

Looking at a daily chart is scary since shares have risen from $10 to $15 since the election. However, the rise has been calm and without any material volatility on the days the market was weak.

On the weekly chart, resistance at $14.50 was broken on Thursday and there is nothing else to slow it down until $20.

Just in case the market tanks on Monday morning, I am putting an entry trigger on the position.

Position 11/30/16 with a UIS trade at $15.25:

Long UIS shares @ $15.25, see portfolio graphic for stop loss.

No options recommended because of price and spreads.

XLF - Financial SPDR ETF - ETF Profile


Banks rose on positive economics and Trumps new appointees. Positive comments this morning plus a blowout ADP report with 216,000 jobs sent the sector higher.

Original Trade Description: November 16th.

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.

Position 11/17/16:

Long March $23 call @ 29 cents. No stop loss.

BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description


New intraday low.

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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