Option Investor

Daily Newsletter, Wednesday, 5/3/2017

Table of Contents

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

Market Wrap

Another Day of Consolidation

by Keene Little

Click here to email Keene Little
Since last week's strong showing in the stock market it has been consolidating and we had more of the same today. The techs were relatively strong but they were weaker today as they start their consolidation/reversal. We continue to wait for the next big move.

Today's Market Stats

The reaction to AAPL's earnings report in the after-hours session on Tuesday was negative and it drove NDX futures (NQ) lower. That pointed to a negative open for the techs but they recovered quickly this morning, as did AAPL. The other indexes continued their week-long pattern -- the RUT is relatively weak while the blue chips chop sideways/down and hold the middle ground.

Between the sideways/down consolidation for the blue chips, which looks like a bullish continuation pattern, and the corrective (3-wave) pullback for the RUT we have a potentially bullish setup for the market. That doesn't mean it can't drop lower first but at the moment it's looking more bullish than bearish.

This morning's economic reports had little effect on the market. The ADP Employment report was in line with expectations, coming in at 177K vs. expectations for 170K but a drop from 255K in March (which was revised down from 263K). ISM Services came in better than expected at 57.5 vs. expectations for just a small bump up to 55.8 from 55.2 in March.

There was a small gyration around this afternoon's FOMC announcement but with no real changes from the Fed there wasn't much for the market to react to. There was practically no expectation from the market for a rate increase and true to expectations the Fed kept rates the same.

The Fed reiterated its goal to raise rates twice more this year but did acknowledge a slowdown in the first quarter. The FOMC statement made reference to the slowdown but thinks it is "likely to be transitory." The general feeling by analysts is that the Fed's statements were essentially neutral since there was an absence of information about what plans the Fed might have about reducing their balance sheet.

Until the Fed has more data to help identify whether or not the slowdown in Q1 is in fact "transitory" (they love that word) they are wisely keeping their cards close to the vest. Holding rates steady and not discussing balance sheet reductions is a smart move so as not to disturb the market. Wow, I actually said the Fed made a smart move. Will wonders never cease?

With the FOMC announcement out of the way the market can now focus on earnings and so far they've been good. But one of the problems continues to be how accurate these earnings are. So many expenses are moved "off the books" and there are so many accounting gimmicks (GE is famous for them) that it's really anyone's guess how healthy companies really are (or aren't).

There are also some big problems with company's balance sheets and that is far more important that one quarter's earnings. Some of the biggest companies are in serious trouble. Johnson & Johnson is an example -- it reported operating cash flow of $18.7B in 2016 in its annual report. That sounds great but the problem is how much it's spending. With the cost of dividends, stock buybacks, debt repayment (companies have borrow big time in the past several years, much of it to pay for stock buybacks and dividends), capital expenses and more, JNJ spent $22.8B in 2016, $4.1B more than it earned.

AT&T is another example -- they earned $39.3B in operating cash flow in 2016 but they spent $44B on dividends, stock buybacks and capital expenses. Disney earned $13.2B but spent $16.7B. GE didn't have any positive operating cash flow. These big companies are not alone and they're some of the more heavily weighted companies in the S&P 500 index. It's an unsustainable trend and all the borrowing of these companies is starting to weigh them down.

Another consequence is that investors are now much more heavily invested in ETFs than individual stocks or sector mutual funds. So pricing of individual stocks is now becoming blurred. Fundamentally strong stocks are lumped together with weak stocks and they're all being bought and sold together. This is a phenomenon that is unprecedented and the big question is what happens when the market gets hit with large sell orders. All stocks will get sold, not the weak or selective ones. The baby will get thrown out with the bath water.

These are fundamental issues with the current market and while it doesn't prevent a continuation of the rally (hell, we could be in the middle of a massive melt-up that will take the market much higher than most believe possible) any cracks in the foundation should be watched closely since like a crack in a large dam, once the water starts to break through it could develop into a massive flood in a heartbeat.

As for the immediate future (the next week), I do see the potential for the market to head higher following the pullback correction from last week. I'll start the review with the SPX weekly chart.

S&P 500, SPX, Weekly chart

The pattern for the rally from February 2016 has formed a rising wedge pattern, which is common for the last leg of a larger rally, which in this case is the one from March 2009. The wave pattern is not clear, which means there are several possibilities. My best guess is as labeled on the weekly chart below, which calls for the rally to continue and potentially into June before we'll see a final high near 2500.

The correction following the March 1st high might not be over yet and we could see a sharp leg down to the uptrend line from February-November 2016, currently near 2300. That would be enough to scare a lot of bulls out of the market and get it ready for the next rally. But if it continues to chop its way higher from here I would be more cautious about upside potential.

S&P 500, SPX, Daily chart

On the weekly chart I show the key level to the downside at 2275, which is based on a pullback pattern that could see SPX drop down that low but still be in a larger bullish pattern. Below 2275 would be a much more bearish development. On the daily chart below I show the key level to the downside at 2360 since that would be a break of multiple support levels, including the 20- and 50-dma's, which care coming together near 2366, and its uptrend line from November 4 - April 13, currently near 2363.

Much below 2360 would more strongly suggest we'll get a drop down to at least 2300, if not 2275, but as mentioned above, that would not necessarily be longer-term bearish. It might be but it would depend on what kind of price pattern followed that kind of decline. Consider the possibility for a scary sharp pullback but at the moment the consolidation off last week's high looks like it will be followed by another push higher, even if it will be just a test of the March 1st high at 2401. Putting my bearish cap on, the double top with bearish divergence, if MACD crosses down, would be a time to get short.

Key Levels for SPX:
- bullish above 2401
- bearish below 2360

S&P 500, SPX, 60-min chart

The consolidation following the April 26th high looks like a bull flag continuation pattern, the top of which is currently near 2392. A break above that level should lead to at least a test of the March 1st high at 2401 and possibly up to a price projection near 2407, where the 2nd leg of the rally off the March 27th low would be 162% of the 1st leg up. A drop below the bottom of the pattern, near 2377, and then below Tuesday's gap at 2374 would be a failure of a bullish pattern and would likely lead to a sharp decline.

Whether or not a new high from here would be THE high for at least a while or if it will instead by followed by another consolidation is up for debate. The price pattern following a new high would provide the clues -- another consolidation would be followed by another push higher but a sharp impulsive decline would tell us we had a trend change. Shorter-term trading is the recommendation for now and waiting for a break in one direction or the other from the current consolidation pattern is the safer way to play the market right now.

Dow Industrials, INDU, Daily chart

Like SPX, the Dow has been chopping its way slowly lower following its April 26th high. It too looks like a little bull flag pattern and if it marks the half-way point of the rally from April 19th we could be looking for a rally to 21565, or at least up to the trend line along the highs from May 2011 - December 2014, near 21450. But a drop below the bottom of its little bear flag, currently near 20855, would be the first sign of trouble for the bulls (for at least a larger pullback) and then below 20640 would confirm the likelihood for a much larger decline (20K target).

Key Levels for DOW:
- bullish above 21,170
- bearish below 20,640

Nasdaq Composite index, COMPQ, Daily chart

With Tuesday's high near 6103 the Nasdaq came close to its trend line along the highs form April 2016 - March 1, 2017, which is now near 6131. Its pullback from Tuesday morning looks like a correction and if it continues to bounce on Thursday we could see a test of that trend line. But the pullback has the potential to develop into a more bearish pattern and any further pullback on Thursday could start to accelerate lower.

The pattern for its rally from February, like the others, could be a rising wedge, in which case we might see a choppy move higher to frustrate the bears (since it will constantly look like it's ready to break down but doesn't). Not until it breaks below its April 3rd high near 5929 would I start to think more bearishly about this index.

Key Levels for COMPQ:
- bullish above 6170
- bearish below 5928

Russell-2000, RUT, Daily chart

The RUT has been the weak sister in the past week and that's never helpful for the bulls. But so far it has only a 3-wave pullback that has nearly achieved two equal legs down for the pullback (near 1382 and today's low was 1386). Until it can get below its 20- and 50-dma's, currently near 1382 and 1379, resp., it's hard to turn bearish yet. A drop below its uptrend line from November 4 - April 13, near 1369, would have it looking more bearish. But if the rest of the market heads for at least a minor new high I see the potential for the RUT to at least test, again, its trend line along the highs from 2007-2015, currently near 1428.

Key Levels for RUT:
- bullish above 1428
- bearish below 1364

KBW Bank index, BKX, Daily chart

Following the money (the banks) is not helping at the moment in trying to figure out the next move for the market. BKX is currently stuck between its 50-dma above, currently near 93.10, and 20-dma below, currently near 90.80. The price pattern since last week does not help at the moment and I see an equal chance of rallying from here or dropping down near 90.30 for a larger pullback before heading back up. Above 93.60 would be bullish while a drop below 90 would be bearish (for a drop down to at least the 87 area).

U.S. Dollar contract, DX, Weekly chart

Today the US$ got a nice bounce but it's all within a trading range since last week when it broke its uptrend line from May 2016, near 99.15. It then tested its 50-week MA at 98.45, which is holding as support, but the choppy consolidation since last week looks like a bearish continuation pattern. We could see a back-test of the broken uptrend line, currently near 99.46, before heading lower.

We're getting some signals from the commodities markets that's worrisome if you're a bull and looking for higher stock prices. Commodity weakness in 2015 led to the largest pullback the stock market had seen since 2011 and the picture is starting to look similar. The agriculture sector is breaking down, as can be seen with company's stock prices, such as Agrium, Monsanto and ADM.

Industrial mining companies are also breaking down (uptrend lines from January/February 2016 are breaking, as can be seen on the commodities chart shown further below). Oil is also threatening to break down as is the oil services sector.

A breakdown in the commodities sector is cause for concern for two reasons: one, lower commodity prices affects the outlook for inflation; two, lower commodity prices shows lack of demand which means the global economy is slowing down. Neither of these two things is good for stock prices.

The Fed might even be forced to back off on their rate-increase campaign, including their desire to reduce their balance sheet. Even the Canadian dollar is starting to break support since its strength, and Canada's economy, is dependent on strength in the commodities. Between the commodity slowdown and an enormous housing bubble, Canada banks could soon be in serious trouble.

The Chinese stock market ($SSEC) is also in trouble, having recently broken its uptrend line from May 2016, which once again shows a slowdown in their economy and that affects demand for commodities.

Bloomberg Commodity index, DJUBS, Weekly chart

For the commodity index, DJUBS, its uptrend line from January 2016 was broken in the first week of March. The trend line was then back-tested in mid-April before dropping back down, which left a bearish kiss goodbye and sell signal. It's possible this index is in a bullish sideways consolidation and a break above 89 would be a bullish move. But at the moment it's on a sell signal and pointing lower. This bears watching over the next few weeks since it will likely help us determine which direction the next move will be for the stock market.

Gold continuous contract, GC, Daily chart

Gold lost $18 today and broke multiple support levels in the process. Yesterday it back-tested its broken 20-dma near 1271 and then dropped down to its 200-dma at 1256.70. Today it broke below its 200-dma and only paused at its 50-dma, near 1250, before continuing lower, breaking its uptrend line from December 2016 in the process, near 1243. It also closed below its March 30th low near 1241. It did close slightly above its 200-week MA, at 1235.60, so we could see at least a bounce correction but it's looking bearish from here.

Silver continuous contract, SI, Daily chart

Silver has been pointing the way for the metals, having first broken its moving averages and its uptrend line from December. It's still possible the sharp decline from April 17th will complete a 3-wave correction off the March 1st high, to then be followed by the start of a new rally. If we see a sharp rally follow the current decline I'll consider the bullish possibility more seriously but right now I'm expecting a bounce soon and then a continuation lower.

Oil continuous contract, CL, Weekly chart

Oil has dropped down to an uptrend line from April 2016, which is arguably the bottom of a rising wedge for price action since the June 2016 high. It's possible we'll see another leg up inside the rising wedge but if it breaks below the bottom of it, now near 47.60, we'd likely see oil drop much lower.

Economic reports

Thursday and Friday have a lot more economic reports but the biggest one is the NFP report on Friday. However, even that will likely receive a ho-hum response if there are no big changes or surprises, neither of which are expected.


Last week, on Monday and Tuesday, we had the big gaps to the upside and the market has done virtually nothing since then. The techs kept heading higher but they're now running into resistance and have started to pull back/consolidate. The week-long consolidation looks bullish and normally I'd be a buyer of this pullback. But I also know this market is overbought and losing momentum and we've seen too many of these consolidations at market highs suddenly break down instead. That makes me cautious and I'd rather wait for a break one way or the other (more than just a quick head-fake break) before entering a new trade.

The larger consolidation pattern off the March 1st highs (excluding the techs, which simply marched higher) also looks bullish but I could easily argue the need for a sharp leg down before the pullback is complete. So again, this is a tough spot to enter a new trade. If SPX drops down to 2275-2300 before it will be ready for another rally then it's clearly too early to buy the dip. I feel the upside potential does not warrant the downside risk at the moment.

If the market does push higher I think it won't be much (famous last words of a bear using no stops) before reversing back down. Be careful chasing the market higher from here (raise your stops if trailing the rally higher). Conversely, even if we get a sharp decline I would not get complacent about the short side since it could be just the conclusion to a larger pullback from March 1st and not the start of something more bearish.

Bottom line is keep your timeframe short and your trading light. It's a good time to conserve your trading capital while we wait for a better trade setup.

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

Keene H. Little, CMT

New Plays

No Long Term Future

by Jim Brown

Click here to email Jim Brown
Editor's Note

Sectors come and go and this one has no long-term future. Coal saw a resurgence as candidate Trump rose in the polls and then rocketed higher once he was elected. That excitement has faded.


No New Bullish Plays


WLB - Westmoreland Coal - Company Profile

Westmoreland Coal Company, through its subsidiaries, operates as an energy company. The company operates through Coal - U.S., Coal - Canada, Coal - WMLP, and Power segments. It produces and sells sub-bituminous coal and lignite to power plants. The company owns and operates coal mines in Montana, North Dakota, Ohio, and Texas, the United States; and Alberta and Saskatchewan, Canada. It has total proven or probable coal reserves of approximately 888,202 thousands of tons. The company is also involved in the production of electricity. It operates two coal-fired power generating units with a total capacity of approximately 230 megawatts in Weldon, North Carolina. Westmoreland Coal Company was founded in 1854. Company description from FinViz.com.

Westmoreland shares spiked from $8 to $20 post election and the excitement has left the stock in the recent months. Westmoreland was trading below $4 when Trump began his rise in the polls talking about putting coal miners back to work. Now that the excitement is fading I would not be surprised to see shares return to $4.

The coal sector is on life support. Cheap natural gas burns cleaner, is easier to transport and there is no storage required. Coal is dirty, requires long trains traveling halfway across the country and large rail yards and storage yards to hold the inventory. As long as gas remains under $5, currently $3.22, that will be the fuel of choice.

Westmoreland has a little more going for it because it owns two power plants but it is still losing money on coal.

They recently reported a loss of 41 cents on revenue of $392.7 million. For the full year they lost -$1.47 per share. They are being forced to restate earnings because of past problems.

They guided for a weak 2017 and said two supply contracts had expired. Warmer weather was also weakening demand.

Earnings June 27th.

Shares are $10.25 with support at $8.50 but that support was based on expectations for Trump to win the election. The expectations that coal use would somehow miraculously rebound have now evaporated.

Sell short WLB shares, currently $10.25, initial stop loss $11.50

I am not recommending the put options because of wide spreads but the June $10 put is 90 cents, $9 put is 50 cents.

In Play Updates and Reviews

Not Encouraging

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets sold off as expected and the rebound was lackluster. The Nasdaq declined as expected after Apple's earnings but the drop was minimal at -23 points. The Dow recovered from the morning drop to close barely positive. The S&P gave back the 3 points it gained on Tuesday and closed on 2,388 once again.

The markets are refusing to decline materially but they are also continuing the weakness from late last week. There is no excitement in the market and the earnings disappointments from Facebook and Tesla should result in another down open on Thursday.

The small caps posted another big decline and the Russell closed just above that critical 1,388 level. A breakdown there would target 1,340 again.

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

BBRY - Blackberry - Company Profile


No specific news. No movement.

Original Trade Description: April 28th.

Research In Motion Limited designs, manufactures, and markets wireless solutions for the mobile communications market worldwide. The company was renamed Blackberry Ltd in an effort to change its public identity. The company's products include BlackBerry smartphones and accessories, including bundles, cases, audio and memory products, Bluetooth, chargers, batteries and doors, and card readers; SureType, a keyboard technology, which allows users to compose messages using single-handed operation or two-handed thumb-typing; and SurePress, a touch screen that helps in navigation and typing. Its products provide access to time-sensitive information, including email, phone, short messaging service, and Internet and intranet-based applications. The company's products also enable third party developers and manufacturers to enhance their products and services with wireless connectivity to data. Blackberry Limited markets and sells its products directly, as well as through strategic partners and distribution channels. It has a strategic alliance with Hewlett-Packard Company to deliver a portfolio of solutions for business mobility on the BlackBerry platform. Company description from FinViz.com.

Blackberry has evolved from a hardware vendor to a software company. They no longer produce their own phones and their main product is a secure software interface that is used by security conscious governments and firms everywhere.

Blackberry has moved from just a phone company to multiple product lines including software packages for automobiles. Blackberry just signed a new deal with Ford to use the Blackberry QNX software. The software has been deployed in more than 60 million vehicles. BlackBerry is a mobile-native security software and services company dedicated to securing people, devices, processes and systems for today's enterprise.

The Blackberry phones now run an Android operating system. The Blackberry KeyONE was just launched in the UK with a 4.5 inch screen above a traditional Blackberry keyboard. The device will go on sale in May in the rest of the world. The phone has a Qualcomm Snapdragon 625 chipset, 3gb of RAM, 12MP rear camera, 8MP front camera, Android 7.1 and a 3,505mAh battery for long life. Blackberry phones fill a niche for those who want an actual keyboard and/or greater security than you can get in other phones.

In their recent earnings the CEO said Blackberry was looking at opportunities for branded tablets, wearables, medical devices, appliances, point of sale terminals and other smartphones. The key point is that Blackberry security software will be integrated into all Blackberry branded items even though they will be made by over companies. That makes them low risk, all reward, opportunities.

They announced a couple weeks ago they had been awarded $814 million in royalty overpayments plus attorney's fees and interest from Qualcomm. The arbitration proceeding has been in process for a long time. This is a major infusion of cash for Blackberry.

Shares spiked to $9 on the award. After some initial profit taking they have started to rise again and closed at a new 52-week high on Friday.

Update 5/1/17: CEO was on CNBC this morning talking about accelerating transition to a software service company. Video of interview

Earnings June 30th.

Position 5/1/17:

Long BBRY shares @ $9.34, see portfolio graphic for stop loss.

Optional: Long July $10 call @ 35 cents. No stop loss.

FNSR - Finisar Corp - Company Profile


No specific news. Minor decline in a weak market.

Original Trade Description: April 24th.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks, including the switches, routers, and servers used in wireline networks, as well as the antennas and base stations used in wireless networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Finisar Corporation markets its products through its direct sales force, as well as through a network of distributors and manufacturers' representatives to the original equipment manufacturers of storage systems, networking equipment, and telecommunication equipment, as well as to their contract manufacturers. Company description from FinViz.com.

We played Finisar several weeks ago and got caught in the downdraft on China worries. Reports out of the sector suggested orders from China had slowed. Shares crashed from $35 to $21 over the period of about six weeks. Raymond James said the selloff is overdone and the worries over China are overblown.

China is on track to network 120 major cities with populations of more than one million. That will take a lot of networking gear. The directives have been given from the governmental level but the actual orders will come from the provincial level. Bids for routing and wireless components have already been submitted and optical equipment is expected to be next in line.

Raymond James said Finisar has the most upside potential with a target of $39 and is cheap with a PE of only 9 times 2018 earnings estimates.

Shares have rebounded the last two days after the Raymond James note to investors.

Earnings June 8th.

Update 4/26/17: The U.S. government expanded its investigation regarding compliance with sanctions programs against Iran, Cuba, Sudan and Syria. The target is China-based Huawei but OCLR, ACIA, LITE and FNSR have similar operations. Last month ZTE, a peer to these companies, pleaded guilty and faces fines of $1.2 billion. If the government is going name by name in their investigation, investors may reconsider their ownership of these companies. At least one analyst said today's dip on sector related news rather than company specific, was overdone.

Update 4/28/17: Stifel Nicolaus lowered their price targets on LITE, FNSR, FN and OCLR but maintains a buy rating. The new target on FNSR declined from $39 to $33 with shares at $23. The analyst cut the targets based on the slowness in bid requests from China's governments on the 120 city networking project.

Position 4/25/17:

Long FNSR shares @ $23.10, see portfolio graphic for stop loss.


Long June $25 call @ $1.20, see portfolio graphic for stop loss.

PTCT - PTC Therapeutics - Company Profile


No specific news. Minor decline after two weeks of gains.

Original Trade Description: April 19th.

PTC Therapeutics, Inc., a biopharmaceutical company, focuses on the discovery, development, and commercialization of orally administered, small molecule drugs that target post-transcriptional control processes. The company's lead product is Translarna (ataluren), for the treatment of nonsense mutation Duchenne muscular dystrophy in ambulatory patients; and which is in phase III clinical trials to treat cystic fibrosis caused by nonsense mutations. It also develops Translarna, which is in Phase II clinical trials for the treatment of mucopolysaccharidosis type I caused by nonsense mutation, nonsense mutation aniridia, and nonsense mutation Dravet syndrome/CDKL5; and RG7916 that is in Phase I clinical trials to treat spinal muscular atrophy. In addition, the company's product candidate in cancer stem cell program include PTC596, an orally bioavailable and potent small molecule, which has completed phase I clinical trials that targets tumor stem cell populations by reducing the activity and amount of a protein called BMI1. PTC Therapeutics, Inc. has collaborations with F. Hoffman-La Roche Ltd and Hoffman-La Roche Inc., and the Spinal Muscular Atrophy Foundation to develop and commercialize compounds identified under its spinal muscular atrophy sponsored research program; and research collaboration with Massachusetts General Hospital for the treatment of rare genetic disorders resulting from pre-mRNA. Company description from FinViz.com.

PTC suffered two hits in March. The first was a failed drug trial on a Cystic Fibrosis drug. That drop knocked shares down from $13 to $10. Drug trials fail all the time and that is just the risk of owning a drug company.

On March 15th, the company announced it was buying a Duchenne Muscular Dystrophy (DMD) drug named Emflaza from Marathon for cash and stock. Companies buy rare drugs from other companies all the time. This particular drug had just created a hornet's nest of controversy after Marathon priced it at $89,000 per year. There had been a monster uproar over the pricing and even Bernie Sanders got into the act saying it should be $1,000 a year. For PTC to jump into the hornet's nest with a $140 million upfront purchase before the drug even succeeds in the market caused investors to flee the stock.

Here is the key point. The drug is in a class called corticosteroids that are anti inflamatories used all around the world to treat DMD as well as other diseases. The drug can be cross marketed and sold for multiple applications besides DMD.

The drug is new and was just approved by the FDA in February. When Marathon priced it at $89,000 right in the middle of the drug price happenings in Washington, they were forced to pause the launch to re-evaluate the price. PTC arrived on the scene and solved their problem.

Now PTC is evaluating the "correct" pricing for the drug and shares are rebounding from their headline induced crash.

Update 4/20/17: The company announced they had completed the acquisition of Emflaza earlier than expected.

Earnings June 15th.

PTC shares broke through resistance on Wednesday to close at a two month high at $11.39. Resistance is now $14 to give us a potential $2 window.

Position 4/20/17:

Long PTCT shares @ $11.43, see portfolio graphic for stop loss.

No options due to prices and wide spreads.

USO - US Oil Fund ETF - ETF Profile


Crude declined again after the 0.9 million barrel decline in inventories reported the EIA was less than the -4.1 million barrel drop reported Tuesday evening by the API. It is only a matter of time before we begin to see dramatic inventory declines as we approach the summer driving season.

Original Trade Description: April 22nd.

The United States Oil Fund LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca.

The investment objective of USO is for the daily changes in percentage terms of its shares NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO's Benchmark Oil Futures Contract, less USO's expenses.

USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.

Oil prices fell -6% last week after Wednesday's inventory report failed to show a significant decline in crude inventories. Complicating the problem was the expiration of crude futures on Thursday. That means everyone long for the EIA report had to dump their position immediately to avoid expiration.

I expect the price of crude to return to $54 over the next several weeks. That equates to $11.25 or higher on the USO ETF. The ETF closed at $10.32 on Friday. I am recommending we buy the $10.50 call, currently 42 cents and plan to double our money and exit.

Oil prices will rise because refineries are restarting production after their normal two-month maintenance period centering on March. Oil inventories will begin to decline sharply in the coming weeks as they begin to fill the system with summer blend fuels before Memorial Day.

You could also just buy the USO ETF for $10.32 but you will get a better return using the option. I would not recommending buying a $10 stock with the intention of making 75 cents.

Position 4/24/17:

Long Jun $10.50 call @ 40 cents, no stop loss.

WLL - Whiting Petroleum - Company Profile


No specific news.

Original Trade Description: May 1st.

Whiting Petroleum Corporation, an independent oil and gas company, engages in the development, production, acquisition, and exploration of crude oil, natural gas liquids, and natural gas primarily in the Rocky Mountains region of the United States. It sells oil and gas to end users, marketers, and other purchasers. As of December 31, 2016, the company had total estimated proved reserves of 615.5 million barrels of oil equivalent; and interests in 1,917 net productive wells on approximately 517,200 net developed acres. Whiting Petroleum Corporation was founded in 1980 and is based in Denver, Colorado. Company description from FinViz.com.

Whiting reported an adjusted loss of 15 cents and analysts were expecting a loss of 22 cents. Revenue of $371.3 million beat estimates for $361.4 million. Production of 10.6 million Boe beat guidance of 10.4 million Boe. Lease operating expenses declined from $9.00 to $8.56. General and administrative expenses declined from $3.15 to $2.34 and interest expenses declined from $4.80 to $3.83 per share.

Earnings July 26th.

The company raised guidance for the year for multiple reasons. They just completed a three-well Loomer pad in North Dakota using advanced completion models with longer laterals and 8.9 million pounds of sand in each well. The resulting production suggests each well will produce 1.5 million Boe over their productive life. That is 50% higher than other wells in the area. That equates to roughly $75 million in revenue from each well with an initial cost of about $9 million each.

Whiting plans to apply this completion method to all its 2017 wells while continuing to test and improve on the model.

Also helping Whiting is the recently completed Dakota Pipeline that President Trump approved a couple months ago. That makes it considerably easier to transport oil out of the Bakken and at a lower cost.

Whiting raised full year guidance to 45.2 to 46.2 million Boe but did not raise the capex expectations. The production guidance was raised because of the better completion methods. This will be a 23% increase in production from Q1 start to Q4 end.

Energy companies have been hammer recently with oil prices falling back under $50. This is a temporary situation. The refinery maintenance cycle was longer than normal and the restart just accelerated over the last two weeks. Inventories last week declined -3.6 million barrels and they should continue to decline sharply over the next four months. Prices will rise as the summer driving season begins.

I think the September $9 option is too expensive at $1.13 and the $10 option is expensive as well. The June options are a short fuse with earnings after expiration. The tradeoff suggests the short term June would be the best play.

Position 5/2/17:

Long WLL shares @ $8.55, see portfolio graphic for stop loss.
Optional: Long June $9 call @ 60 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description


Minor rebound due to market weakness. If the market bullishness continues, the VXX should continue to bleed points. Long term, the VXX always goes down.

Original Trade Description: April 12th.

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.

The VXX has rebounded $3 over the last week as the volatility returned. The VIX traded over 16 today and could hit 18 if there are any geopolitical events over the Easter weekend.

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 market 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 know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.

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