Option Investor

Daily Newsletter, Wednesday, 12/14/2016

Table of Contents

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

Market Wrap

No Surprise From the Fed

by Keene Little

Click here to email Keene Little
The market expected a +0.25% rate increase and that's what it got. The market also expected some statements about an improving economy and the need for further rate increases in 2017 and that's what the Fed told us. The market's reaction was a bit of "but I want more" and promptly sold off on the news.

Today's Market Stats

There were no surprises from today's FOMC announcement, with the +0.25% rate increase and a promise for more, and the market had already baked this information into the cake. Without additional "good" news the market sold off in a sell-the-news reaction. But a post-FOMC reaction if often reversed the next day and there are some support levels tested this afternoon, leaving the door open for the bulls to charge back through and take the market higher. But they'll need to not waste time Thursday morning.

The market of course did not care about any of this morning's economic reports, nor will it care about tomorrow's or the next day's, or the next. This morning's economic reports were mixed with weaker than expected retail sales, industrial production and Business Inventories (lower inventory builds will lower GDP). PPI numbers came in stronger than expected -- November was up +0.4%, which is nearly +5% annualized. This could be one factor that has the Fed talking a little more hawkishly about rates in 2017.

As for what the market really cares about right now, I think it comes down to just two things -- WWTD and WWFD -- what will Trump do and what will the Fed do. And of course no one really has a clue about either. The strong rally from the beginning of November has been one based on hope and they're the most dangerous kind of rallies (most often found in bear markets). Nothing has changed and we have no idea how much or how little Trump's team will be able to accomplish. Hope-filled rallies are emotional rallies and they're subject to fast reversals when that hope is popped.

As far as what the Fed will do, following the no-surprise +0.25% increase, they told us today they were feeling confident enough in the economy to promise us 3 more rate hikes in 2017. That was a good-news, bad-news thing because on the one hand it's good for all of us if the economy is truly getting stronger and is able to handle 3 more rate hikes. But there are multiple bad-news scenarios with increasing rates, one being the greater difficulty in paying down debt that is tied to Treasury yields, such as mortgages. The Federal and State governments, companies and individuals are carrying massive amounts of debt and servicing that debt is going to become an increasingly difficult burden to carry. That will have a significantly negative effect on the economy.

More significant than even in the U.S. is what higher rates could do to worldwide economies and banking systems. A stronger dollar, which not surprisingly rallied strong this afternoon, creates negative problems for international companies. And because the U.S. dollar is the world's reserve currency a strong dollar makes it difficult for countries to service their debts in U.S. dollars (because their currency is devalued). Companies and countries have been borrowing in U.S. dollars because of our abnormally low interest rates over the years. These companies and countries that borrow in U.S. dollars will then typically hedge their position by buying U.S. dollar contracts and if the dollar rises they simply use the profits to offset the higher loan amount they have to pay back in their local currency. Problem fixed!

But one of the problems with borrowing U.S. dollars and hedging with long dollar contracts is that it's actually causing a shortage in U.S. dollars, which of course seems ludicrous with all the dollar printing the Fed has been doing. But this is a clear example of how the market is so much bigger than the Fed. And dollar shortages will cause problems for those wishing to buy more as a hedge against a devaluation of their own currency. With the inability to hedge they could find themselves unable to fully service their loans and that of course will hurt the banks. It's a global economy and a global financial system and the Fed should be fully aware of the problems they're creating on a global scale. But once again this is a good example of them being book smart and common sense stupid, just as they've demonstrated to us repeatedly since Greenspan's days at the helm. How this will all play out in the coming years is anyone's guess but there's very little likelihood it will play out well.

Even our own economy is very likely unable to handle rate increases. Too many economists see numbers indicating the strengthening in the jobs market but too few seem to notice or care that these jobs are mostly in the low-wage sectors. Consumers are once again at record levels of debt and higher interest rates are going to kill the engine of our economy -- the consumer. Many are looking positively at the idea that the Federal government will spend more money next year, money that it doesn't have, since they see it as a great way to boost the economy. After all, according to economists like Paul Krugman, we're simply paying the interest to ourselves, disregarding the fact that it's still money that was created out of thin air that needs to be paid back and we don't have it.

When people, companies and countries reach the level of debt we now see, borrowing more creates a tipping point and even for the government that can simply print more money it's been shown that more debt produces fewer positive results. We're trying to fly the airplane behind the power curve, which is the point where more power is needed in order to hold the airplane up while slowing further. It's taking more money to keep our economy flying but we're now behind the power curve and close to stall speed. The Fed is not helping.

The concerns mentioned above are of course down the road and if there's one thing we know about the stock market is that it disconnected itself from reality a long time ago. So we stick with short-term indications to help us figure out if the rally/decline will continue or if instead we're setting up for a reversal. At the moment, even though the rally could continue, we're seeing a plethora of signals that warn us of an impending trend change. Sentiment has swing far over into the bullish column and now dangerously so.

The CNN Fear & Greed index has shown a large and fast move from extreme fear in the beginning of November to extreme greed currently. Not only is it a dangerous time for bulls when too many become bullish (the market can simply run out of buyers) but it's also the rate of change that is dangerous. There's been no time for the market to "breathe" and let traders in and out of trades, and it's that "breathing" in and out that makes for a slower rally but a more committed one (longs have been tested with pullbacks and are committed to the upside). This northbound train has been on the express route with no stops along the way and when it stops we're going to see everyone trying to squeeze through the little doors to get out just about the time someone yells "FIRE!"

CNN Fear & Greed index

The market is overbought and overloved and we're seeing some short-term bearish divergences on the charts as the momentum slows. But all of this is not a rally killer today; these signals simply warn us not to be complacent about the upside and instead start looking behind you for possible trouble (like a bear on the rampage).

Because of the significance of the pattern for the RUT I'll start tonight's chart review with this index. I often talk about the RUT being a good "sentiment" index, showing us when investors are feeling bullish (risk-on) and when they're feeling more fearful (risk-off) and the rally off the November 3rd low showed us investors were clearly feeling frisky. The RUT led the charge back up the hill and while the RUT's pullback from last Friday could simply be a breather before at least one more charge against the stone wall it ran into last week, the risk here is that its rally completed last week.

Russell-2000, RUT, Weekly chart

The wall that the RUT ran into, or nearly so, is the trend line along the highs from 2007-2014-2015, currently near 1400. That continues to be upside potential if the RUT can push at least a little higher than last Friday's near 1393. It would be more bullish above 1400 but I'd be careful about a head-fake break. In addition to the trend line there is a price projection near 1392, which was achieved with last Friday's high. This is the 127% extension of its previous decline (June 2015 - February 2016), which is a common reversal level. With that price projection lining up so closely with the trend line I think it's going to be very tough resistance to break through. As mentioned on the chart, this trend line fits as the top of a bearish megaphone pattern (a topping pattern, which often is the left half of a diamond topping pattern). The bottom of this megaphone will be near its May 2011 high at 868 in April 2017. That's not a prediction but it is the vulnerability for price in this pattern (or it could take longer to go lower to the bottom of the pattern).

Russell-2000, RUT, Daily chart

Today's decline was a strong break of the uptrend line from November 3rd, which obviously looks bearish. But another bounce back up to a minor new high, for a back-test of the broken uptrend line, remains a possibility. That would also have it testing the top of its megaphone pattern shown on the weekly chart above. The RUT has dropped back down near a shorter-term trend line along the highs from July-September, currently near this afternoon's low at 1354, and then the next support levels would be it November 25th high at 1347 and then its 20-dma, currently near 1341 and climbing. But as is true for several indexes, the pullback from its recent high is only a 3-wave move and for the RUT it nearly achieved two equal legs down, at 1353.58, with this afternoon's low at 1354.07. That sets it up for the next rally leg if that's what's coming. This is one reason why the bulls need to step back in right away Thursday morning and prevent the bears from taking the ball back.

Key Levels for RUT:
- bullish above 1393
- bearish below 1347

Another reason to question the rally, or at least not get complacent about it, is that it isn't supported by market breadth. The chart below shows the advance-decline line for the AMEX since April. It peaked in September and is so far showing a lower high vs. the higher price high for the RUT. This is typically seen in the last leg of a rally and it supports the need to be wary of how far this rally has stretched without the underlying support of all the stocks in the index.

Before moving on to my regularly updated indexes I wanted to show a weekly chart of the NYSE Composite index and the Wilshire 5000 index, which are both arguably better indicators for the broader market. The weekly setups for both of them are for a trend change, back to the downside. They both reversed where the bears needed them to reverse and now the next couple of days will tell us whether or not the bears will capitalize on the setup.

NYSE Composite index, NYA, Weekly chart

What I find interesting at the moment is how well NYA reacted to a price projection at 11254.90, two trend lines defining its rally from February and its previous high in May 2015, at 11254.87. A price projection for two equal legs up from June, at 11254.90, is only 3 cents above the May 2015 high and it was achieved yesterday with its high at 11256, essentially just a point higher. Today's decline has it pulling back from this price-level resistance as well as a trend line along the highs from April-August and a back-test of its broken uptrend line from February-June, both of which cross this week near 11255. From a technical perspective we have multiple reasons to look at 11255 as strong resistance and today's pullback could be the start of something bigger, especially if today's selling is followed by more (instead of just a 1-day post-FOMC reaction).

Wilshire 5000 Total Market index, W5000, Weekly chart

The reason I mentioned the price projection for two equal moves up from June is because of a type of wave pattern that I'm watching for the rally from February. It hasn't been looking impulsive, which would suggest a stronger rally potential, and has instead looked corrective, which suggests only a bounce correction to its previous decline (into the February 2016 low). Some indexes do look more bullish but overall I'm not getting a strong bullish wave pattern. So far the W5000, I'm looking at two 3-wave moves up from January (a lower low in February does not negate the idea) and the first one is up to the April high and the 2nd 3-wave move is from June. The two 3-wave moves are equal near 23842, which was nearly achieved with Tuesday's high at 23802. For the 2nd 3-wave move up, two equal legs points to almost 23786, which was achieved this week. Another projection is the 127% extension of its previous decline May 2015 - January 2016, at 23621, was also achieved but now lost with today's decline. The 127% extension is important to watch because it's often a failure level for a correction.

S&P 500, SPX, Daily chart

A level that I talked about last week, with my discussion about the Gann Square of 9 chart, was 2271 and 2273. SPX 2271 is aligned with the March 2009 low at 666.79 while 2273 is square to March 6, the date of the 2009 low. Yesterday's high was 2277 but it closed at 2271 and today's high was 2276 but it closed at 2253 and it remains possible the 2271-2273 area will hold as resistance to any further progress. I remember back in October 2007 pretty much pounding the table about 1576 being an important number on the Gann Sof9 chart since it's on the same vector as the October 2002 low so we had alignment for the completion of the 2002-2007 cyclical bull. The high for SPX in October 2007 was 1576 and now we have the same alignment for the completion of the 2009-2016 cyclical bull (except with a 4 to 6-point throw-over if we don't get another new high). It's uncanny how this Sof9 chart works and right now it's telling us the bull just bought the farm and the bears are coming out of their caves. Only time will tell us whether or not it's true.

With today's low at 2248 SPX is back down to its broken/recovered uptrend line from February-June so we'll see if it holds as support. The bears need to see SPX below 2240 to give it a more significant break but it will still be the form of the pullback/decline that will tell us when a trend change has occurred. At the moment the pullback can be argued to be corrective but a sharp decline tomorrow morning would make it look more impulsive. Then we'd know to start looking for the subsequent bounce to short. For now the trend is still up but based on what I mentioned above, a break of the uptrend line from November 4th, near 2245, would trigger sell alarms (someone yelling "FIRE!" as people are trying to get off the northbound express train).

Key Levels for SPX:
- bullish above 2278
- bearish below 2240

S&P 500, SPX, 60-min chart

The SPX 60-min chart below gives a closer look at the trend lines currently in play. In addition to the uptrend line from February-June, near this afternoon's low at 2248, a trend line along the highs from November 10-25, near 2252, looks to be supporting the pullback. In fact it can be viewed as a back-test of the broken trend line and now all the bulls need is a bullish kiss goodbye to launch the next (and likely final) rally leg, potentially up to 2300. Below 2240 is when the bears would be in a little better shape (I never say in good shape because to be a bear is to expect sharp gashes from the bull's horns). It's how much steak a bear can eat before getting gashed that determines whether he lives or not.

Dow Industrials, INDU, Daily chart

With this week's highs the Dow achieved a price projection at 19904, which is where its rally from November 4th has two equal legs up, with the half-way point being the small sideways triangle that it formed November 14-18. A measured move like that is often a reversal level but it's too early to tell if it will lead to just a pullback before heading higher or something more bearish. The Dow has been strong (defensive play?) and needs to drop a lot further, at least below 19400, before the bullish pattern could be in trouble. But it's the need for an impulsive (5-wave) move down to tell us a trend change has been made.

Key Levels for DOW:
- bullish above 19,904
- bearish below 19,400

Nasdaq-100, NDX, Daily chart

Unless NDX blasts off to the upside from here it's looking like a choppy move up from November 4th for what looks like an ending pattern. Above Tuesday's high at 4960 would be bullish but at the moment it's looking like a failed attempt to bust through the top of a parallel up-channel from November 4th and a trend line along the highs from July-October, near 4938. But overall, the pattern is too choppy since August to give me any clear sense of direction. Follow the others.

Key Levels for NDX:
- bullish above 4960
- bearish below 4854

If you only like playing the long side and shy away from shorting anything, even buying puts, I think it's time to shift your focus from buying stocks to buying bonds. The bond market has been selling off strongly while the stock market rallied and now it's looking like we could be on the cusp of a reversal for both. If so, you can join the crowd rotating from stocks back into bonds.

Sentiment is ripe for a reversal as well since investors have become strongly bearish the bonds. Speculators held a record net short position in U.S. Treasuries, according to the most recent data from the Commodity Futures Trading Commission. Net shorts in the 10-year equivalent bonds increased to -$72B from -$58B a week earlier, which is the most since 2008. Many are calling the long bull market in bonds dead (I'm not so sure about that but I'm in the minority) but regardless, the sentiment setup is for at least a large correction before bonds continue selling off (and yields pull back).

20+ Year Treasury ETF, TLT, Weekly chart

TLT has dropped down to its uptrend line from February 2011 - December 2013, near 116.50, with today's low at 116.80. We'll soon see if support holds, in which case long against the low would be a long trade that could work nicely for at least a bounce correction to the decline.

Transportation Index, TRAN, Daily chart

A week ago the TRAN shot above two parallel up-channels, from January and June, and then above its November 2014 high at 9310. Yesterday it pulled back to the November high and looked like it was setting up for a bullish back-test. But today it dropped back below its high, which is bearish (potential failed breakout attempt), and is now close to testing the tops of the parallel up-channels that it broke out of, currently near 9190 and then 9150. I have a key level to the downside for the bears to break at 8906 (the November 30th low) but we'd have a bearish heads up with a break below multiple support levels down to its 20-dma, currently near 9077 and rising. There's still bullish potential here but the bulls can't waste much time.

U.S. Dollar contract, DX, Daily chart

The US$ bounced sharply back up this afternoon and made a new high above its November 25th high. At the moment it's looking more like a test of the high rather than something more bullish but obviously some follow through to the upside would help negate the bearish divergence seen on the daily chart. The weekly chart supports higher prices and we could see it stair-step higher into January if it doesn't get knocked back down quickly. If the dollar does continue higher we'll then likely start to hear how much it's going to hurt the profits of international corporations, as well as trouble brewing in other countries and the devaluation issues of their currencies. The Fed will then be pressured to back away from further rate increases.

Gold continuous contract, GC, Daily chart

Gold dropped further today as the dollar rallied but it should be nearing support at a price projection for the 2nd leg of its decline from July. The 2nd leg would be 162% of the 1st leg at 1121, which is now within spitting distance of gold's low at 1136.40 so far. What kind of bounce correction follows will then tell us whether or not to expect lower prices. A choppy consolidation near the low would point to lower and likely down to a test of its December 2015 low at 1045.40. But a stronger bounce, especially if it gets back above 1204, would be potentially much more bullish since the pullback from July is only a 3-wave move and a possible correction to what will become a more powerful rally.

Oil continuous contract, CL, Daily chart

With Monday's high for oil at 54.51 it nearly tagged a price projection for two equal legs in an a-b-c bounce correction off the August low, at 54.94. It had also poked above the top of a parallel up-channel for the bounce but then dropped back below and left a flaming shooting star for Monday's candlestick. The downside follow through today helps confirm a likely reversal back down. It could result in just a pullback before heading higher (above 55 would be bullish) but the choppy ending pattern for its bounce has it looking like it could continue its longer-term decline.

Economic reports

Thursday morning we'll get a slew of economic reports, which the market will likely largely ignore. CPI, Philly Fed, Empire Manufacturing and the NAHB Housing Market index will join the normal unemployment claims data. On Friday we'll get housing starts and permits. I will add that the chart for the home builders is looking bearish following its high in August 2015 and then lower high in July 2016.


The market rallied into the FOMC announcement and then sold off afterwards. Buy the rumor, sell the news. So far it's all been pretty typical but it's what happens the rest of this week that will tell us what to expect into next week and maybe for the rest of the month/year. The pullback from this week's highs (last Friday's high for the RUT) can be considered just a correction to the rally. A rising wedge pattern for SPX from November 4th points to the potential for one more leg up inside the rising wedge to complete a nicer looking 5-wave move. But the RUT has broken down from its rising wedge and it could be the canary that just fell off its perch.

I see upside potential for SPX to 2300 (only 24 points above this morning's high at 2276) but considering the alignment on the Gann Square of 9 chart, at 2271-2273, we might have just put in an important high, just like the one in October 2007. Again, we should know better in the next couple of days. The first thing the bulls need to do is recover from this afternoon's selloff, which is a typical pattern so we'll see if they can do it again. I continue to believe upside potential is dwarfed by downside risk but we don't have any clear signals yet for the bears to jump in. The upside is risky while it's still early to consider the short side. That means both sides should be staying cautious rather than aggressive.

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



Don't forget to reward yourself with our 2016 End-of-Year Annual Subscription Sale!  You’ll save $1,147 when you renew now.

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see for at least a year! There isn’t a minute to spare. 
Order now.

Renew for as little as $495,
ONLY $1.35 per day

New Plays

Volatility Rising

by Jim Brown

Click here to email Jim Brown
Editor's Note

Now that the Fed is old news, Dow 20K will be back in focus along with the Quadruple Witching. The potential for increased volatility is growing. Since the close today the S&P futures have been down -3 and up +3.50 and are now back at zero. There is growing indecision about what the next seven trading days will bring. With the Russell 2000 melting down, I was unable to find any play candidates tonight that were worth the risk.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Russell Leading

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 has now declined -2.6% from its highs last week and is now a leading market indicator. The Russell has always been a sentiment indicator for the market and that sentiment is turning bearish. The Russell gave back another 17.5 points today and is -32 points off its Friday high.

The major indexes are always volatile after a Fed decision and today was no different. The Dow spiked up to 19,966 and only 34 points from touching 20,000. The selling was immediate and on rising volume. I wrote last week about the potential for shorts to try and establish new positions just below 20K in order to beat the rush and that is what happened today.

I am purposely keeping the stop losses tight to limit our losses because of the anticipated decline over the next four weeks. I will be adding new positions only when there is a very strong reason to do it. We need to be conscious of the potential for a significant market decline and not put on new positions just to be stopped out.

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

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

SMCI - Super Micro Computer - Company Profile


No specific news. Only a minor decline with the market. Holding at resistance.

Original Trade Description: December 7th

Super Micro Computer, Inc., together with its subsidiaries, develops and provides high performance server solutions based on modular and open architecture. It offers a range of server, storage, blade, workstation, and full rack solutions, as well as networking devices, server management software, and technology support and services. The company also provides a range of application optimized server solutions, including rackmount and blade server systems; and server subsystems and accessories comprising server boards, and chassis and power supplies, as well as other system accessories, including microprocessors, and memory and disc drives. In addition, it provides customer support services and hardware enhanced services. The company offers its products to data center, cloud computing, enterprise IT, big data, high performance computing, and Internet of Things/embedded markets. It sells its server systems, and server subsystems and accessories through direct sales force, as well as through distributors that comprise value added resellers and system integrators, and OEMs. Company description from FinViz.com.

Supermicro makes the best and most versatile computer servers, in my opinion. I have a tech background starting in 1967 and have been around servers and mainframes all my adult life. When I started Option Investor in 1997 we started with Super Micro servers and we have upgraded multiple times over the last 20 years and it has always been with Super Micro.

While they make great servers they have had some "public company" problems since coming public in 2007. Over the last four years they have traded as low as $7 and as high as $41. Back in July shares were crushed after they slashed guidance in half for a multitude of reasons including restructuring, component shipping delays and weaker than expected orders from several large accounts. Shares fell to $19 from $26. After three months they reported good earnings in late October and shares have been in rally mode since the election.

Earnings Jan 26th.

Shares are approaching resistance at $29 but I do expect them to break through given their recent guidance. It may not happen on the first test, but I expect it to happen.

Position 12/9/16 with a SMCI trade at $29.25

Long SMCI shares @ $29.25, see portfolio graphic for stop loss.

Optional: Long Jan $30 call @ 80 cents, see portfolio graphic for stop loss.

UIS - Unisys Corp - Company Profile


No specific news. Only a minor decline despite the weak 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.

YRCW - YRC Worldwide - Company Profile


No specific news. Minor decline with the market.

Original Trade Description: December 5th.

YRC Worldwide Inc., through its subsidiaries, provides various transportation services primarily in North America. Its YRC Freight segment offers various services to transport industrial, commercial, and retail goods; and provides specialized services, including guaranteed expedited services, time-specific deliveries, cross-border services, coast-to-coast air delivery, product returns, temperature-sensitive shipment protection, and government material shipments. It serves manufacturing, wholesale, retail, and government customers. As of December 31, 2015, this segment had a fleet of approximately 8,500 tractors comprising approximately 7,300 owned and 1,200 leased; and approximately 32,000 trailers consisting of approximately 27,300 owned and 4,700 leased. The company's Regional Transportation segment provides regional delivery services, which include next-day local area delivery and second-day services, consolidation/distribution services, protect-from-freezing and hazardous materials handling, and other specialized offerings; expedited delivery services that consist of day-definite, hour-definite, and time definite capabilities; interregional delivery services; and cross-border delivery services, as well as operates my.yrcregional.com and NewPenn.com, which are e-commerce Websites offering online resources to manage transportation activities. As of December 31, 2015, this segment had a fleet of approximately 6,600 tractors, including approximately 5,500 owned and 1,100 leased; and approximately 13,000 trailers comprising approximately 11,300 owned and 2,000 leased. The company was formerly known as Yellow Roadway Corporation and changed its name to YRC Worldwide Inc. in January 2006. Company description from FinViz.com.

YRCW shares were crushed in early November after they reported earnings of 42 cents compared to estimates for 53 cents. Revenue of $1.22 billion missed estimates for $1.23 billion. The CEO said the results were impacted by a soft industrial backdrop and lower fuel surcharge revenue compared to the prior year. Who would have thought that low fuel prices would hurt earnings for a trucking company. Apparently, they have engineered their fuel charge program to profit from the fluctuations in the rates. Many companies do this since fuel prices are very volatile. Instead of changing the rates monthly and confusing customers, they project a quarterly rate. If they guess right they make a few cents on the fluctuations. If they guess wrong they lose a few cents but the customer rate is fixed for the quarter. With fuel rates relatively low and stable over the last couple quarters, the rate fixers probably assumed too low a base.

The CEO also said the less than truckload (LTL) sector remained steady despite the recent economic headwinds. With the economy ticking up for late Q3 and Q4, and this being a holiday shipping quarter, the Q4 earnings should be significantly better.

Earnings Jan 26th.

The transportation sector as evidenced by the Dow Transports ($TRAN) is on the verge of breaking out to a new high. Trucking is leading the charge.

Position With a YRCW trade at $14.05

Long YRCW shares @ $14.05, see portfolio graphic for stop loss.

Previously Closed 12/12/16: Long Jan $15 call @ 53 cents. Exit $2.30, +$1.77 gain.

BEARISH Play Updates

FIT - FitBit - Company Profile


No specific news. New historic low. Eleven of the last 12 ratings changes have been downgrades.

Original Trade Description: December 3rd.

Fitbit, Inc. provides wearable health and fitness tracking devices. It offers various products, including Fitbit Zip, an entry-level wireless tracker that allows users to track daily activity statistics, such as steps, distance, calories burned, and active minutes; Fitbit One, a clippable wireless tracker, which tracks floors climbed and sleep, as well as daily steps, distance, calories burned, and active minutes; Fitbit Flex, a wristband-style tracker that tracks steps, distance, calories burned, active minutes, and sleep; and Fitbit Charge, an activity and sleep wristband, which tracks steps, distance, calories burned, active minutes, floors climbed, and sleep. The company also provides Fitbit Alta, a customizable wristband that offers call, text, and calendar notifications when paired with the user's phone and SmartTrack automatic exercise recognition; and Fitbit Charge HR, a wireless heart rate and activity wristband. In addition, it offers Fitbit Blaze, a smart fitness watch that provides multi-sport functionality, tracks outdoor cycling activity, and provides run cues; Fitbit Surge, a fitness watch that features a GPS watch, heart rate tracker, activity tracker, and smartwatch; Aria, a Wi-Fi connected scale that tracks weight, body fat percentage, and body mass index; and Fitbit accessories that include bands and frames for Fitbit Blaze, bands for Fitbit Alta, colored bands for Fitbit Flex, colored clips for Fitbit One and Fitbit Zip, device charging cables, wireless sync dongles, band clasps, sleep bands, and Fitbit apparel. The company offers its products through consumer electronics and specialty retailers, e-Commerce retailers, sporting goods and outdoors retailers, and wireless carriers; and corporate wellness channels, as well as directly worldwide. Company description from FinViz.com.

FitBit is finding it is hard to move from the "nice to have" category to the "have to have" category. Quite a few of the millennial generation already have a FitBit but the majority are stuck in the back of a dresser drawer never to be worn again. The fitness watch is a fad. How many of us have bought a treadmill, stair climber, "insert your device name here" and it is either gathering dust in the corner or was eventually sold off in a yard sale to make room in the house?

The fitness watch is a great device if you are really into fitness. Since America is the most obese population on the planet, apparently the fitness crowd is in the minority.

When FitBit reported earnings, they guided for a bleak Q4 shopping season. There are too many competitors and not enough buyers. Last week FitBit offered between $34 and $40 million for Pebble, a smartwatch pioneer that has also fallen on hard times. Considering Pebble turned down an offer for $750 million in 2015, that shows you how tough the sector has become. Pebble has been laying off workers and trimming the product line. FitBit wants Pebble because of their unique operating system.

FitBit revenue rose at triple digit percentages in the prior three years. Over the last three quarters revenue has risen 50%, 47% and 23% in Q3. FitBit is only expecting 5% growth in Q4. Net income has posted double digit percentage declines in each of the last three quarters.

FitBit is in trouble. Some of the major watchmakers are now offering fitness watches and Apple is also chipping away at that market segment. FitBit closed at a historic low on Friday at $8 and it is almost a sure bet they will hit $5 without a surprise acquisition announcement by somebody else.

Earnings Feb 1st.

Update 12/8/16: Deutsche Bank downgraded FIT from buy to hold.

Position 12/5/16:

Short FIT shares @ $8.18, see portfolio graphic for stop loss.

Optional: Long Feb $7 put @ 50 cents.

IWM - Russell 2000 ETF - ETF Profile


The Russell 2000 lost -1.3% and the IWM dropped nearly $2. I expect more volatility before a big decline begins.

Original Trade Description: December 10th

The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.

The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.

I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 14 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -1,850 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.

Dow - January 2016

We also have the potential for a really messy inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.

I am recommending a long put on the Russell ETF. There is no stock vehicle we can use other than the VXX to capitalize on a market sell off. The VXX is flawed and while it may go up, it may not go up enough to make it worthwhile and it is volatile from day to day. I chose the Russell ETF because the premiums are cheap and the volatility should work in our favor. If you cannot use options then I suggest you buy the VXX shares at the first sign of market weakness after Christmas.

There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.

Because the market could still rise, I want to follow the IWM higher and enter the position only when the ETF rolls over.

The ETF has short-term support at 137.75 and again at $137.25. I am recommending we enter the position with a dip to $137. If the Russell continues higher, I will continue raising the entry point as needed.

Position 12/12/16 with an IWM trade at $137.00

Long Feb $134 put @ $3.38, see portfolio graphic for stop loss.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now