Option Investor

Daily Newsletter, Wednesday, 1/11/2017

Table of Contents

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

Market Wrap

Bulls Keeping the Bears Away

by Keene Little

Click here to email Keene Little
The stock market's rally looks tired and the bears are licking their chops while eyeing the bulls as just slabs of beef. But the bulls keep going and keep frustrating the bears by aborting any selling attempts. This could continue into next week.

Today's Market Stats

The market continued its choppy and whipsaw ways today as the indexes cycled in and out of red and green. Each time the bears look like they might be able to get some stronger selling started, like today's late-morning selling into the midday low, it got reversed. The sellers then gave up after another attempt to drive the market lower and a late-afternoon rally drove the indexes to their daily highs. Follow-through is now the key -- if the market can continue this afternoon's rally we might see the log jam break and take the indexes to new all-time highs again.

Part of the explanation for today's whipsaws comes from the Donald. Trump held is first formal press conference and disappointed many by talking less about his fiscal and tax policies and more about how he's going to beat up on China and Mexico. This created some turmoil in the markets -- stocks, bonds and currencies -- as the market tried to figure out what he might do. This confusion might get more significant the closer we get to the inauguration next week.

The challenge for the market at the moment is that the strength of the rallies has been declining. The momentum, as measured by such indicators as RSI and MACD, has been waning (leaving bearish divergences at the tests of previous highs) and trading volume is drying up. The rally from November seems to have pulled in most of the buyers and now it appears the market is struggling to attract new buyers.

Greg Schnell, who writes some very good technical analysis over at StockCharts.com, mentioned trading volume between Christmas and into this week is the lowest he's seen since 2009. The chart below shows this 3-week trading period for each new year and how this year it's running significantly below previous years, especially in January this year. Last year saw a significant price decline from December 29th into January 20th. This year we're having a rally from December 30th, so the opposite of last year. But the volume is much lower than it was in January 2016 and that should be worrisome for bulls. Volume is the power behind a move and right now we appear to have a 6-cylinder engine running on maybe 4 cylinders.

We're heading into opex week next week, which is typically a bullish week, and the rally since November has been largely with the assumption that a Trump administration and Republican Congress will be able to get some things done and spend more money that we don't have. We could see a continuation of the rally, even if slowly and in a choppy fashion, into the President's inauguration, which is Friday, January 20. Opex Friday and inauguration could be a good date for the completion of the rally (buy the rumor, sell the news). I can only speculate about that possibility but so far it appears doable. The charts will hopefully tell the story and show us what to watch for in the coming week.

The tech indexes have been the stronger indexes this January and I want to start a review of the charts with the weekly view of the Nasdaq. While it appears to have at least a little more upside potential I think there are some strong reasons to hedge any bets/positions on the long side.

Nasdaq Composite index, COMPQ, Weekly chart

The weekly chart of the Nasdaq shows an up-channel for the rally from 2010-2011. The wave count suggests the rally from February 2016 is the 5th wave and as usually happens, it has acted weaker than the rallies before it. It has been pressing up against the middle of the up-channel but other than minor breaks above it, such as right now, it hasn't been able to break through on a closing weekly basis. Currently near 5530 we'll see if it has better luck this week and then more importantly if it will be able to hold above the midline for next week's close.

You can see the bearish divergence on RSI since the end of 2013, which is not necessarily a rally killer but it does offer a reason to believe the rally will not be able to make it up into the top half of its up-channel. The leg up from February is also now a 5-wave move with the 5th wave being the leg up from November. It too is showing bearish divergence since August, which helps confirm the wave count. So we have a 5th of a 5th wave here and when it finishes it will mean a very larger retracement at a minimum. This is the riskiest time to be long the Nasdaq since a breakdown is likely to occur quickly.

Nasdaq Composite index, COMPQ, Daily chart

Today's daily candle for the Nasdaq is a hanging man doji up against the top of its rising wedge pattern for the rally from November (5th waves typically create ending diagonals (rising or descending wedges) since the momentum declines and it becomes more and more difficult to add more points). Today's hanging man doji is not a guarantee for a reversal but if Thursday finishes in the red it would be a confirmed bearish reversal pattern. But a rally above 5575, that stays above that level, would be a bullish breakout from the bearish rising wedge pattern and I'd expect to see the Naz proceed up to the top of its larger rising wedge (for the rally from February), which will be near 5645 by the end of next week (end of opex week and inauguration day).

Key Levels for COMP:
- bullish above 5575
- bearish below 5485

Nasdaq Composite index, COMPQ, 60-min chart

Trend lines for the short-term view are getting crowded around current price action and it's hard to say which one is the stronger one. But at the moment, the top of the rising wedge for the rally from November is currently near 5572 and we could see another test of that line, like Tuesday's test, to complete the rally. The short-term bearish divergence on the 60-min chart, along with the bearish divergence on the daily and weekly charts, tells us the rally is likely running on fumes and when the little rocket engine quits we're going to see a return to earth. This rally could see just enough buying to continue to work its way higher into next week, typically a bullish week, but I think it's a bet that carries higher risk than normal.

Nasdaq-100, NDX, Daily chart

NDX is similar to the Nasdaq in that it has run up into its trend line along the highs from November 10 - December 13 and closed on the line with today's close at 5050. On Thursday the trend line will be near 5060 and obviously it would be more bullish above that level (on a closing basis). If long this index (QQQ) I think a good stop is this morning's low at 5012 since a drop below that level would indicate a top is likely in place.

Key Levels for NDX:
- bullish above 5060
- bearish below 4960

S&P 500, SPX, Weekly chart

Not a whole lot has changed for the SPX weekly chart since not much has happened since it made a high at 2277 back on December 13th. It's been in a 50-point trading range since that high but with today's close at 2275 it's currently just below 2277. For several weeks I've been pointing to the trend line along the highs from April-July-August 2016, which fits as the top of a rising wedge for the rally from February, as the upside target if the bulls can keep the market heading higher. That line will be near 2310 by Friday, January 20, which would take us through opex week and into the President's inauguration, both of which could keep the market bullish. That would likely be a MOAP (Mother Of All Puts) setup if it happens.

After opex and after the inauguration is when things could fall apart, if not before then. Keep in mind that a rising wedge tends to be retraced faster than the time it took to build it and therefore a quick return to the February low at 1810 is the bearish potential in front of us. This would presumably happen because of disappointment from recognizing that nothing is going to change in Washington, DC. For those who remember all the "hope and change" talk back in 2008, as Sarah Palin later once asked, "how's that hopey changey thing workin' for ya?" Unfortunately, very little changes in Washington just because we get a new titular head in place. It's possible we're going to see disappointment settle in quickly after Trump gets sworn in.

S&P 500, SPX, Daily chart

While there is still the potential for SPX to rally up to the 2310 area, as mentioned above, there are some things that suggest it's not going to happen, or that it's not going to make it that high even if it is able to push higher. The first thing is the waning momentum in the rally, as can be seen with the bearish divergence on the daily momentum oscillators. Last Friday's new all-time high at 2282 was met with a significant bearish divergence and it would now be difficult to even suggest being in a long position here. SPX has been struggling near the important Gann Square of 9 level, at 2271-2273 (the levels that are aligned/square with the March 2009 low in both time and price), and today's close at 2275 makes it only the second day (January 6th being the first day) was a close above this Gann zone. Price action has been very choppy for weeks and it could go either way here but it's looking vulnerable to breaking down sooner rather than later. But if the buyers can push this index a little higher it would then be able to test price projections at 2286-2290, which are based on price relationships in the wave count.

Key Levels for SPX:
- bullish above 2291
- bearish below 2233

S&P 500, SPX, 60-min chart

The SPX 60-min chart below is to show an idea how this market could continue to frustrate both sides with a choppy rise higher (two steps forward, one step back). This is for the bullish possibility and is just an idea to watch for since it could keep the rally going in a move that continues to lose strength (momentum) in a small rising wedge to complete larger rising wedges (look out below if it completes next week the way I've depicted). Rising wedges are filled with choppy 3-wave moves (or something more complex but still corrective) and they make it difficult for traders to hang on. This pattern assumes the uptrend line from November 4 - December 30 will continue to hold, as it did this morning. If long, I'd use this uptrend line for a trailing stop and bears who want to play this conservatively, wait for a break of the uptrend line to confirm the top is likely in place.

Dow Industrials, INDU, Daily chart

There are many pundits who are bound and determined to put on their Dow 20K party hats and we could see a 4th attempt on Thursday if this afternoon's rally sees some follow through. Follow through is what has been lacking so if we get some Thursday morning that would be a stronger statement all by itself. On Monday the Dow broke its uptrend line from November 4 - December 30, which is now higher and near 20120, but has not been able to break down below its 20-dma (except marginally with Tuesday's close slightly below it), which is currently near 19890. Another close below this MA could spell trouble for the bulls but at the moment all the choppy sideways price action since mid-December looks like a bullish continuation pattern. If the Dow instead breaks down it would leave a failed bullish pattern, something we've seen at past important highs. Flip a coin for direction from here.

Key Levels for DOW:
- bullish above 20,000
- bearish below 19,718

Russell-2000, RUT, Daily chart

While the techs were running higher since mid-December the RUT ran sideways, chopping up and down between 1354 and 1389. This is a bullish continuation pattern following its November-December rally and upside potential is to its trend line along the highs from 2007-2015, which will be near 1408 by the end of next week. But at the moment the RUT has banged it head on the trend line along the highs from April-June-August 2016 (blue line), which it's been chopping around since mid-December. Today's rally might have been a back-test of the trend line and any selloff from here would leave a bearish kiss goodbye. A drop below 1354 would spell trouble for the bulls since it would leave a failed bullish pattern behind. But keep an eye on MACD at the zero line here since a turn back up from here would create a buy signal (the overbought condition has been relieved with the sideways consolidation). If MACD drops below zero and RSI drops below 50 we'd have further confirmation that the bears are running the show.

Key Levels for RUT:
- bullish above 1410
- bearish below 1354

KBW Bank index, BKX, Daily chart

The banking index has been consolidating sideways for a month now, since December 8th. This too is a bullish continuation pattern and if it breaks out to the upside, starting with a sustained rally above 93.70, we could see a run up to the top of a parallel up-channel from February, currently near 97.50, and perhaps up to a Fib projection at 100.44. The price projections shown on the chart are based off the rally leg from February to May 2016 and you can see how price reacted around each projection in the leg up from June. It's been consolidating on top of the 200% projection (where the leg up from June is twice as large as the February-May rally). As mentioned for the RUT, the sideways consolidation has relieved the overbought condition and if MACD turns back up from the zero line it would be a buy signal. The bears need to see BKX below the bottom of its consolidation range, near 90.80, to indicate the bullish pattern could be failing.

U.S. Dollar contract, DX, Weekly chart

The US$ has continued to pull back but it's not clear yet whether it's going to be just a small pullback correction before heading higher or if it is instead the start of the next leg down inside a megaphone pattern. The dollar rallied during the overnight session and into this morning's news conference by president-elect Trump. His lack of information about his expected fiscal and tax policies created some concern and the dollar crashed back in the late-morning session. Could this be the beginning of the recognition phase where the market begins to realize that not much is going to change out of Washington? As for the dollar, we simply need to see how the next week or two go before getting a better idea about what the next big move will be.

Gold continuous contract, GC, Daily chart

Gold has now made it up to the bottom of a previously broken down-channel for its decline from July. At the same location, near 1193, is its 50-dma so it's a double resistance level for the bulls to deal with. Gold is starting to attract a lot of buyers again so if they can keep up the buying pressure we could see a test of price-level resistance near 1205. A 38% retracement of the leg down from November 9th is 1206 so between price-level resistance and the 38% retracement I'd say gold would be more bullish above 1206. But at the moment it remains possible the bounce is just another head fake, like the one off the October 2016 low, and will be followed by another leg down.

Oil continuous contract, CL, Daily chart

This week oil dropped back below the line across the highs from October 2015 - June 2016, which leaves a failed breakout attempt in December. A pullback in early January held the trend line but Monday's decline dropped oil back below it at 52.40. Today's rally was back up to the line and now we'll see if it holds as resistance. This trend line has/had the potential to be an inverse H&S neckline, which had an upside projection to about 77.50. But a failure to hold the breakout is obviously not bullish and if today's back-test is followed by a bearish kiss goodbye it would likely start stronger selling. It's a good place to nibble on a short play for oil (such as with puts on one of the ETFs or buying an inverse ETF) since you can keep your stop relatively tight.

Economic reports

There are no significant economic reports on Thursday and then on Friday we'll get the PPI numbers, retail sales, business inventories and Michigan Sentiment. These could move the market but in reality the market remains disconnected from any kind of fundamentals and pretty much ignores all economic reports.


For about a month the stock market has been chopping sideways. The techs have been stronger in this regard with January's rally and new highs for the tech indexes. This has left us with a bit of quandary when looking at the different indexes since the sideways consolidations look like bullish continuation patterns and the expectation is for another rally leg out of them. But the tech indexes are now up against potentially strong resistance and look like they could top out at any time, including with today's highs. We could see some rotation into the safety of the blue chips and watch them rally while the techs pull back but at this moment that's pure speculation.

The other factor affecting the market is that we're heading into a typically bullish week, opex, and at the same time next Friday, January 20 is the president's inauguration day. The market has been rallying under the assumption (dare I say "hope") that the market will benefit from the Trump administration's policies. Hope-filled rallies too often turn into disappointment-filled selloffs and I see that as a distinct possibility. Call it a buy the rumor, sell the news setup in front of us.

But from here I can only speculate what factors could influence the markets and even then it's a fool's game trying to figure out how the market will react to those factors. We still have to consider what the Fed will say and how that will affect the market's mood. So we stick with the charts and at the moment each has to be traded on its own merits. The techs say be very careful with the indexes up against resistance. The other indexes say we should be getting ready to buy now for the next rally (but keep in mind that there's the possibility for the bullish continuation patterns to fail, in which case all of the indexes will come tumbling back down).

It's a good time to stay cautious through next week and while it might be a normally bullish period, when it's not it's usually very bearish. Manage your options positions carefully into next week.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

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New Plays

Chemical Rally

by Jim Brown

Click here to email Jim Brown
Editor's Note

The post election rally in industrials also covered the chemical sector. Braksem did not participate until early December when a probe settlement was announced.


BAK - Braskem S.A. - Company Profile

Braskem S.A., together with its subsidiaries, produces and sells thermoplastic resins. Its Basic Petrochemicals segment offers olefins, such as ethylene, polymer and chemical grade propylene, butadiene, isoprene, and butene-1; BTX products comprising benzene, toluene, ortho-xylene, para-xylene, and mixed xylenes; fuels, including automotive gasoline and liquefied petroleum gas; intermediates, such as cumene; and other basic petrochemicals, which include ethyl tertiary butyl ether, solvent C9, and pyrolysis C9. This segment also supplies electric energy, steam, compressed air, and other products to second-generation producers. Its Polyolefins segment produces polyethylene, including LDPE, LLDPE, HDPE, ultra-high molecular weight polyethylene, and EVA; green polyethylene from renewable resources; and polypropylene. This segment's products are used in plastic films for food and industrial packaging; bottles, shopping bags, and other consumer goods containers; automotive parts; and household appliances. Its Vinyls segment produces polyvinyl chloride, caustic soda, chlorine, hydrogen, caustic soda flake, and sodium hypochlorite. The company's USA and Europe segment produces polypropylene in the United States and Germany. Its Chemical Distribution segment distributes solvents, including aliphatic, aromatic, synthetic, and ecologically-friendly solvents; engineering plastics; hydrocarbon solvents and isoparafins; and general purpose chemicals, such as process oils, chemical intermediates, blends, specialty chemicals, and pharmaceuticals. The company also imports and exports chemicals, petrochemicals, and fuels; produces, supplies, and sells utilities, such as water and industrial gases; and provides industrial services. The company was formerly known as Copene Petroquimica do Nordeste S.A. and changed its name to Braskem S.A. in 2002. Company description from FinViz.com.

In early December, Braskem announced a potential settlement in a probe that was started in 2014 when controlling shareholders Odebrecht and Petrobras (PBR) became a target in a corruption scandal. Between 2006-2014 the company had paid $250 million into an account created by Odebrecht to pay bribes to politicians and political parties in Brazil.

The potential settlement would allow those shareholders to eliminate their ownership and the money collected be divided between the USA, Switzerland and Brazil. The deal would formally erase any potential liabilities for Braskem. On December 14th Braskem said it was paying $920 million in fines over six years with half paid now and the rest paid in annual installments starting in 2018 Source

JP Morgan immediately upgraded the company from neutral to overweight.

Braskem is the largest petrochemical in South America.

Shares have been moving up steadily now that it is free from the probe that has weighed on shares for the last two years. The prior high was $32.

Earnings Feb 9th.

Buy BAK shares, currently $22.82, initial stop loss $21.50

No options recommended because of the wide spreads.


No New Bearish Plays

In Play Updates and Reviews

Market Turning Bullish

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes survived a major hit intraday and still finished positive. The Trump comments on drug prices crushed the biotech sector with a 4% decline intraday and pushed the major indexes back into negative territory. A sudden burst of buying late in the day rescued the indexes and lifted them all back into positive territory.

This was a perfect opportunity for the sellers to gain the upper hand but the dip buyers remained alive and aggressive. This suggests we could see another try at Dow 20K on Thursday and positive bank earnings on Friday could produce another upward surge.

However, Friday's before 3-day weekends are notorious for late day selling rather than risk potential headline events overseas while our market is closed. There is also the headline risk surrounding the inauguration next Friday. While the market appears to be turning more bullish, there are still potential potholes in our path.

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

VXX - VIX Futures ETF
The short position remains unopened until a trade at $24.50.(REVISED)

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

HZNP - Horizon Pharma - Company Profile


The Trump comments on drug prices knocked the biotech sector for more than a 4% loss intraday. Horizon rebounded off the lows but still lost 4%. Support appeared at $17.

Original Trade Description: January 7th.

Horizon Pharma plc, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of arthritis, pain, inflammatory, and/or orphan diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; DUEXIS and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis; and PENNSAID for the treatment of pain of osteoarthritis of the knees. Its products also include MIGERGOT to treat vascular headache; RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus and multiple other indications; and KRYSTEXXA to treat chronic refractory gout. The company has a collaboration agreement with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer. Company description from FinViz.com.

Horizon recently received approval to sell the drug Quinsair in Canada. It was already approved in the EU. This is a drug for the management of chronic pulmonary infections in adults with cystic fibrosis. Only about 75,000 people around the world are candidates for the drug and 4,500 in Canada. They acquired the drug when they bought Raptor Pharmaceutical Corp in October.

The company also announced they had received a Notice of Allowance from the U.S. Patent office on the drug Ravicti. This will result in a patent being issued to Horizon that is good to 2030. Horizon has seven patented drugs and 11 drugs currently available for sale.

Shares of Horizon declined in early December after a late stage trial on another drug failed to achieve the desired result. Shares have been moving up steadily since that December drop. Friday's close was a 4-week high.

Horizon will present next week on the 10th at the JPM Healthcare Conference.

Earnings Feb 6th.

I am putting an entry trigger on the position just in case the market decides to roll over on Monday.

Position 1/9/17 with a HZNP trade at $17.75

Long HZNP shares @ $17.75, see portfolio graphic for stop loss.

No options recommended because of wide spreads.

BEARISH Play Updates

IWM - Russell 2000 ETF - ETF Profile


The Russell dropped on the drug price comments but rebounded to close mildly positive and right in the middle of its recent range. This was still a lower high and while the rebound was decent the chart is still negative.

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 -2,150 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.

SHLD - Sears Holdings - Company Profile


No specific news. In an OP-ED piece Forbes said the sale of Craftsman signaled the opening of the final chapter for Sears. They said the Craftsman sale and the potential sale of the Kenmore and Diehard brands represented a "going out of business" sale.

Original Trade Description: January 9th

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of October 31, 2015, this segment operated approximately 952 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of October 31, 2015, this segment operated 735 Sears stores. Company description from FinViz.com.

We played Sears as a short several times before. We were stopped out on Dec-30th when the CEO arranged a bridge loan to get them out of trouble temporarily. Now that the holiday numbers are starting to come in, the results are very dismal. Sears is eventually expected to file bankruptcy.

In November, they posted a GAAP loss of $748 million and an adjusted loss of $333 million. Gross margins fell to 19.2% compared to JC Penny at 37.2%. Sears is forced to severely discount items to attract what few shoppers they have. Same store sales at Kmart fell -4.4% and -10% at Sears. Revenue fell -12.5% to $5.0 billion.

Earnings March 9th.

Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

Sears closed at a new 14-year low on Dec-28th and the outlook is growing increasingly dim. Suppliers fear a bankruptcy in 2017 once the holiday shopping is over. Several suppliers have halted shipments to Sears on fears they will not be paid.

In early January, they announced they were closing 150 stores. There are 109 Kmarts and 41 Sears stores. Last week they announced the sale of the Craftsman brand to Stanley Black & Decker for $900 million but they get less than half of that in cash. The rest is paid out over the next 3-5 years. That shows how desperate they are for cash since they originally expected to raise $1.5 to $2.0 billion on the sale. Now they are looking to sell the Kenmore and Diehard brands.

With the Craftsman sale and the loan from the CEO and a new $500 million loan secured by real estate, they have developed about $1.5 billion in Liquidity. Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

When they announced the Craftsman sale at less than expected terms, the stock fell back from the early January gains. The outlook is grim despite the short-term cash inflows.

Position 1/10/17:

Short SHLD shares @ $8.97, see portfolio graphic for stop loss.

No options recommended because of price.

VXX - Volatility Index Futures - ETF Description


The VIX spiked intraday after the Trump comments but quickly returned to its lows as the indexes rebounded sharply. In retrospect we should have just shorted the VXX at the beginning of this recommendation when it was $25. It would take a monster market decline to push it back to $29. I am changing the entry trigger to $24.50. We could still get a spike around the inauguration.

Original Trade Description: December 28th

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 began.

We exited the last short at $26.65 for a $7 gain back on December 13th. I am expecting the January volatility to lift the VXX back to $30. That will give us a great entry for the expected market rally in Feb/Jan where the VXX will crash again.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. 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. We may have to rotate in and out a couple times but it will eventually go to $10. Once we are in the position and profitable I will put a trailing stop loss on it. If the stop is hit 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.

I am putting an entry trigger on the position at $24.50, a level we saw on December 1st. I would expect this to be hit in early January. The VXX could rise well over $30 if the market really corrects so I am not putting a stop loss on the position until the correction is over.

With a VXX trade at $24.50

Short VXX shares, currently $21.40, no initial stop loss.

No options recommended because of price.

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