Option Investor

Daily Newsletter, Wednesday, 5/17/2017

Table of Contents

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

Market Wrap

The Market Got Spooked

by Keene Little

Click here to email Keene Little
After being ignored for a long time, the political news surrounding Trump is starting to scare investors who have been content to keep buying as long as the Trump agenda was still possible. That agenda appears to be in trouble and therefore so too might be the rally.

Today's Market Stats

Starting with a sharp decline in equity futures last night, the decline continued today and we had one of the worst selloffs that we've seen since September 2016. Since the rally from November the worst previous selloff was March 21st when SPX lost almost 30 points, vs. today's nearly -44 points. SPX snapped several layers of support today and wiped out in a single day the gains made since April 21st, 18 trading days ago. That follows a quick new all-time high Tuesday morning and it leaves a helluva bull trap up there, near 2406, with today's close nearly 50 points (-2%) lower at 2357.

I'm reluctant to turn the start of tonight's review into a political discussion but obviously it can't be avoided when the reason for today's market decline is based more on the political fighting that's going on rather than anything more market related. Of course the rally from November has been more politically motivated than anything specifically related to the economy or stocks in general. If anything, the environment for stocks has become less supportive of higher prices but hope for what Trump's team was doing kept the rally alive.

The market has been ignoring bad news for a long time, which was actually a sign of strength. Whether it was higher P/E ratios while earnings declined or signs of trouble in the credit markets (default rates are ticking higher) or geopolitical angst, the market didn't care. More trouble? Woohoo, let's rally!

Earnings estimates have been dropping, which has been causing an increase in P/E ratios to historically high levels. The market has been pricing in perfection, whether it was political accomplishments, interest rate changes or geopolitical events and yet all of those conditions have been deteriorating. The market just didn't care but once it does start to care it will then care about historically high P/Es. And if the 'E' is coming down, as it has been for two years (today's earnings are lower than where they were two years ago) then the 'P' will have to come down faster.

As followers of technical patterns in the charts we know that the news will matter when the charts tell us it will matter. The charts have been showing weakening momentum as the indexes hit resistance levels and it was the reason I've been suggesting upside potential is dwarfed by downside risk. The charts have been warning us that we're going to get some kind of news-related event that will suddenly become the catalyst for a correction.

Yesterday's setup for the Nasdaq was an especially strong warning sign even though it closed at its high. We couldn't know what kind of catalyst would provoke some selling but the setup was there, telling us to be very careful about the upside. The same with VIX -- it hit the bottom of its bullish descending wedge last week and started to bounce back up this week, which was a warning sign that something is going to spark a market selloff. We just never know what the spark will be (if we did then it wouldn't be a surprise).

The catalyst for today's decline (starting with a dump in the futures last night) is Trump's potential demise. At least that's the way the media, which hates Trump, is portraying it. There's a lot of false news in the media-inspired frenzy at the moment and as NY Senator Chuck Schumer warned Trump several weeks ago (in so many words), "Don't piss off the intelligence community or else they'll bite back harder." The constant stream of "intelligence" leaks bears out Schumer's warning.

How much all of this political haranguing is real vs. how much is fake news is anyone's guess. But regardless, it's going to affect people's moods and their impression of Trump and his ability to get things done. The rally from November has been based on the changes the Trump administration would be able to make, primarily healthcare reform, tax reform and providing an economic boost through an increase in infrastructure spending.

The healthcare reform is on life support and I'm being kind when I say that. The other reforms and spending plans are in serious jeopardy, especially now that Trump is on the ropes (if you believe the media reports). The Democrats smell blood and are already talking about impeachment hearings. In the end the over-anxious Democrats are probably shooting themselves in the foot because they're forcing Republicans to support Trump, even if reluctantly, and they are the majority party. But that only fans the flames of war between the parties and the mood change from hope to despair will be a rally killer for the market.

The techs have been on a stronger bullish run than the rest of the market and they also led the way down today. The tech indexes lost 2.5% today while the blue chips lost 1.8%. The RUT was also weak, as it has been since December 2016, and it lost 2.8% today. The weakness in the RUT has been another warning sign, especially as it continued to sell off while high-P/E stocks continued to roar higher.

We've had a distorted market for a while and that could continue for longer but a fractured and distorted market is always a time for caution when you're thinking about the upside. It might not be time to aggressively short this market but it's certainly a good time to get defensive about the long side. Bonds rallied strong today, which shows a strong move into the relative safety of bonds. The pattern for bonds supports higher prices so today's move might not be reversed any time soon.

I'll start off tonight's chart review with the VIX since it made a monster move today (up +46%). It's still at a relatively low level (15) but typically a fast move like today's is a sign of "too far too fast" and gets reversed hard the next day. We've seen this time and again during the multi-year stock market rally. I suspect there was a lot of covering of short puts today, especially inside opex week, since many institutions regularly sell premium and then wait for their short puts to expire worthless. It's been a strong income generator since yields have been so low in non-stock assets.

Buying back the short puts is bearish (just like buying puts and shorting stocks, which is also done to hedge short puts) and that's likely one thing that spiked the VIX today. The spike in the VIX could be the kickoff to a much larger pullback/decline in the stock market, especially since we had a nice setup for the reversal. But today's stock market decline looks ready for a bounce correction and that means a likely pullback for the VIX tomorrow.

Volatility index, VIX, Weekly chart

Last week the VIX had dropped back down to the bottom of its bullish descending wedge from 2015 (with confirming bullish divergence since April 2016). I don't know if this is the start of a breakout from the wedge but that's the potential. Today's rally in the VIX now has it testing its downtrend line from August 2015 - November 2016, closing its gap down on April 24th and nearly retracing its decline from April 17th.

The Nasdaq provided a very nice setup into a high yesterday and it's a good index to start a review of the market since it's trading well technically. I'll do a more thorough analysis of the Nasdaq tonight in an attempt to show why yesterday's high is potentially very important.

Nasdaq Composite index, COMPQ, Weekly chart

With the fractal nature of the market, Elliott Wave analysis counts the moves as impulsive (5-wave) or corrective (3-wave or more complex). The move up from 2009 is a 5-wave move and once complete it will be followed by a very large multi-year correction to the rally (potentially something more bearish). It's important to have a good idea where we are in the bull market rally so that extra precaution can be taken when the pattern is telling you to.

As with any of the technical tools available to us, wave counts are somewhat subjective and can be interpreted in different ways. Only after seeing what follows a particular count can the larger count be verified. If the wave count on the weekly chart of the Nasdaq below is correct then we're in the 5th wave of the rally from October 2011 (I'm looking at the rally from October 2011 is the c-wave of a large A-B-C bounce off the 2009 low). The rally from October is in the parallel up-channel shown on the chart.

The 5th wave is now a 5-wave move with an "extended" 5th wave. It's possible we'll see the Nasdaq stair step higher into the end of the year, which would mean just a choppy multi-week pullback before pressing higher again. But the extended 5th wave met a price projection yesterday, at 6167 (with its high at 6170) while hitting a trend line along the highs for the rally from February 2016. The new high was showing bearish divergence against its March 1st high, which was another warning sign.

Nasdaq Composite index, COMPQ, Daily chart

The daily chart of the Nasdaq, shown below, focuses on the latter portion of the 5th wave in the rally from February 2016. The final 5th wave of the move is the leg up from April 13th and it can be seen more clearly how it rallied up to 6167 and its trend line along the highs from April 2016 - March 1, 2017. Yesterday's candle is a hanging man up against resistance, which was a warning sign that it could be followed by a reversal. Today's decline wiped out more than 3 weeks of gains (back to April 25th).

Key Levels for NDX:
- bullish above 6170
- bearish below 6000

Nasdaq Composite index, COMPQ, 60-min chart

The final 5th wave, which is the leg up from April 13th, is shown in more detail on the 60-min chart below. It too will be a 5-wave move and the final little 5th wave is the leg up from May 11th. As it neared the 6167 price projection and the two trend lines along the highs from April 2016 and a shorter-term one from May 1st, it too looked like it was completing a 5-wave move.

I had no idea yesterday what the catalyst for a decline would be but as with the saying, "when the student is ready, the teacher will arrive," so too can it be said "when the market is ready, a catalyst for reversal will arrive."

The multiple degrees of 5th waves completing at the 6167 area led me to believe it would be very strong resistance and the potential completion to the long bull market. That's yet to be proven since it's going to take a lot more price action to see what develops from this high but the potential is for a significant decline to follow.

We could see the Nasdaq drop down to its uptrend line from November-April, near 5985, before setting up a bigger bounce correction but it's also possible the bounce will start from here. It wouldn't surprise me to see a quick flush to the downside Thursday morning and then a snapback reversal to the upside, especially if the uptrend line holds. But once the bounce correction completes, maybe on Friday, we should get another leg down.

S&P 500, SPX, Daily chart

SPX also broke several levels of support, including uptrend lines and its 20- and 50-dma's. It dropped well into its two gaps on April 24th and 25th and basically wiped out the gains made over nearly four weeks. With today's low at 2356 it came within about 7 points of closing its April 24th gap (2348.90). If that gap is closed with a spike down Thursday morning I think it would set up a good reversal back up into a larger bounce correction.

We could see a bounce back up to its 20-dma and broken uptrend line from November-April, near 2386. That would be a nice trade on the long side but I'd then look for another reversal back down into a stronger decline. That's the current setup for this week and into next but obviously subject to change as the market dictates. What the bulls don't like here is the double top against it March 1st high with bearish divergence.

Key Levels for SPX:
- bullish above 2401
- bearish below 2348

Dow Industrials, INDU, Daily chart

The Dow has been weaker than SPX and it has a pattern that is different enough to suggest today's decline could be the completion of a pullback from April 26th. That would be a bullish setup for the resumption of the rally so the bears can by no means feel complacent here. I'm looking for a bounce correction that could see the Dow back up to about 20890 to back-test its broken uptrend line from November-April and its broken 20-dma.

A 62% retracement of the decline from Tuesday would be at 20868. Watch for a possible closure of its April 24th gap, at 20547, Thursday morning to set up at least a bigger bounce. That would also be a back-test of its broken downtrend line from March 1 - April 5, which it had broken above on April 24-25. Below 20547 would be more bearish.

Key Levels for DOW:
- bullish above 21,000
- bearish below 20,000

Russell-2000, RUT, Daily chart

Starting last Thursday through yesterday the RUT kept bouncing off support at its uptrend line from November-April. But that trend line was broken with authority today and the bearish pattern suggests only a small bounce/consolidation on Thursday before heading lower into next week before setting up a larger bounce correction. If it spikes down in the morning and reverses from price-level support near 1347 I would not press bearish bets.

From a strictly price projection perspective, the move down from April 26th achieved two equal legs down today at 1353.60 (actually it stopped 25 cents short of that level) and that could be the completion of a 3-wave pullback correction that will now lead to the start of another rally (or just more sideways chop that the RUT has been in since December).

Key Levels for RUT:
- bullish above 1401
- bearish below 1355

10-year Yield, TNX, Daily chart

With the strong selloff in the stock market today it wasn't surprising to see the Treasury market rallying, which dropped yields. The flight to safety increases demand for the relative safety of Treasuries, driving their prices higher.

A downtrend line from June 2007 - December 2013 for TNX was broken in early December 2016 but it wasn't able to make much headway to the upside after that. It instead formed a double top between December and March near 2.62%, with bearish divergence, and the "valley" between the tops is near 2.3%. The difference between those two levels, 0.32%, becomes the downside projection below the 2.3% floor, which is near 2.0%.

A break below 2.3 in mid-April was followed by a recovery to a lower high and now today's decline is another break below price-level support near 2.3. Today's decline also dropped TNX below support at its downtrend line from 2007 and its uptrend line from July-September 2016, both currently near 2.25. TNX stays bearish below that level but watch for support at its 200-dma near 2.14.

KBW Bank index, BKX, Weekly chart

There were very few sectors that escaped today's selling. The metals, commodities and utilities did well by not selling off, but leading to the downside, and in synch, were the semiconductors and banks. I often say I like to see the SOX and BKX in synch to help support a market move and they both supported today's decline, down -4.4% and -4.1%, resp., which of course is not helpful to the bulls.

The big banks were especially weak, with BAC, GS and MS as examples -- they were down -5.9%, -5.3% and -5.6%, resp. Following the money says we shouldn't even think about getting long but we know moves don't go in a straight line, especially with this market.

BKX has hit potential support at its trend line along the highs from April 2010 - July 2015. BKX broke above this trend line in November, hit the top of its parallel up-channel from 2009 in February-March, came back down for a back-test of its 2010-2015 trend line and then bounced back up to a lower high. Now it's back down to the 2010-2015 trend line, now near 88.40, and my expectation is that support will fail. But never say never to the bulls and now's their chance to rescue the banks.

U.S. Dollar contract, DX, Daily chart

The US$ has been in free fall for the past four trading days, including today. Tuesday's close was marginally below the bottom of a possible bullish descending wedge and a rally today would have left a buy signal.

But instead the dollar has now firmly broken below the bottom of the wedge, currently near 98.20, which leaves a failed bullish pattern in its wake. A failed pattern tends to fail hard so the decline could continue for several more days before we see a correction. The bearish pattern would be in question if the dollar makes it back above 98.15.

Gold continuous contract, GC, Daily chart

The other participant of flight to safety was gold, which finished the day +24.40 (+2%). Just as the stock indexes broke a few support levels in one day, gold also broke a few resistance levels today. It jumped $10 over its 20-, 50- and 200-dma's, all near 1250. It also got back above its broken uptrend line from December-March, currently near 1258.

If the stock market gets a bounce on Thursday we could see gold lose its fight with resistance. If it closes back below 1250 the bearish pattern suggests the start of another leg down. But if the gold bulls can keep up the buying pressure and keep gold above 1260 it will stay potentially bullish (the real test for the bulls will be getting gold above price-level S/R at 1308).

Oil continuous contract, CL, Daily chart

As mentioned earlier, the metals and commodities were beneficiaries of money running out of stocks and looking for a home besides Treasuries. Oil rallied +1.5% today but it's still battling its 50- and 200-dma's, both near 49.30. If the bounce off the May 5th low is just a correction within a larger decline, this is a good place to look for a high and the resumption of the decline. Only slightly higher, at 49.94, is the 62% retracement of the April 12 - May 5 decline. Stronger resistance would be price-level S/R near 51, which would make it more bullish above that level.

Economic reports

The market was not concerned about any economic reports today, not there were any to be concerned about. Thursday's Philly Fed and Leading Indicators will also likely be ignored. There are no major economic reports on Friday. With earnings season winding down and a quiet week for economic reports it's obvious the market went looking for other news. ;-)


The market has been on edge for a while and the market pundits (talking heads) have been beating the drum about why it's different this time and why the market will keep rallying. But with slowing momentum and greater concerns about the economy slowing down, P/E ratios climbing, geopolitical angst, sell in May and go away, etc., it shouldn't be surprising to see the market take a hit. The news really isn't any different today than it's been but the market seems a little more sensitive to it right now.

It's opex week and there could be a big effort to save the week with a rally on Thursday, starting of course with an overnight rally to gap the market up in the morning. That would effectively blow the new shorts back out of the water.

But margin selling could create a gap down in the morning, in which case I think it would probably set up a buying opportunity (for a trade). As reviewed in the charts, there are some potentially strong support levels not far below today's lows and a quick washout in the morning (to get the margin selling out of the way) could lead to a snapback rally.

Whether today's selling was a washout event that will now lead to another rally leg or is instead just the start to a larger decline will be the argument going forward. The large move in VIX suggests at least a snapback correction but I think the market has more work to do on the downside even if it's to be just a pullback before heading higher next month. That means the next large bounce correction should be watched carefully as a shorting opportunity. I don't think the market is done shaking the trees yet.

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

Keene H. Little, CMT

New Plays

Hysteria Over

by Jim Brown

Click here to email Jim Brown
Editor's Note

Wednesday's headline crash is behind us and odds are good it was a one-day wonder. The word impeachment was used hundreds of times on Wednesday and the U.S. is still functioning normally. The Justice Dept appointed a special prosecutor on the Russian collusion investigation and not the democrats and the press have less to complain about. They will have to wait for the results just like the rest of us. Appointing a special prosecutor just put a stop to a lot of the uproar.

There is likely to be some remaining volatility over the next two days as margin calls are covered and some traders sell the bounce after getting caught looking the other way.

In the small cap space there are not a lot of options for buying the dip. Individual stocks can remain volatile and some of them declined 7-8% today alone. I decided to go with a straight option play on the Russell 2000 ETF. That way we are insulated from individual stock movement and we can participate in any market rebound.


IWM - Russell 2000 ETF - ETF Profile

The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities. Description from iShares.com

The Russell 2000 has been moving sideways since early December and has tested both sides of its range multiple times. The spike to a new high at the end of April was sold when the cat fight started in Washington. Fund managers were concerned the tax reform package would be delayed.

Unfortunately, that happened and the political headlines turned deadly with the selling climax on Wednesday.

Now that a special prosecutor has been appointed many months will pass before there is any material news out of that office. For all practical purposes the press and the democrats have lost a rallying cry. Now they have to wait like the rest of us. The market should rebound.

However, there could be volatility on Thr/Fri as margin calls are covered and weekend event risk causes traders to take profits in a shaky market.

I am bringing back the IWM option trade we tried to put on in the middle of April but could not get an entry point. I am recommending we go long at the open on Thursday and hang on through the volatility.

Buy IWM July $138 call, currently $2.22, no initial stop loss until next week.


No New Bearish Plays

In Play Updates and Reviews

Major Breakdown

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap indexes imploded with the Russell falling -39 and the S&P-600 losing 22. I am hoping this is a one day wonder and the headlines out of Washington will subside overnight now that a special prosecutor has been appointed. The futures are positive in the evening session.

There was very little stock news. This was simple a knee jerk reaction to the headlines and it became a self fulfilling drop as stop losses were hit.

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

FNSR - Finisar
The long stock position was stopped at $23.95.

STM - ST Microelectronics
The long stock position was stopped out at $16.25.

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

Short term Calls and Puts on equities = Option Investor Newsletter

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


Blackberry announced new mobile software to allow crisis managers, police forces, fleet managers, etc, to always know where their personnel are located. The AtHoc Account is an authorized solution for Federal government FedRAMP applications. The software merges inputs from managers, call center operators, data streams from HR and travel systems as well as self reporting by individuals. BBRY shares only declined 8 cents in a very bad market.

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

Update 5/4/17: TechCrunch reviewed the new BlackBerry phone and said it was the one they should have introduced 10 years ago. CNBC also did an article on it. Read it Here

Update 5/15/17: Blackberry is actually profiting from the WannaCry malware. The company pivoted to a software security firm a couple years ago and they offer security for both mobile and enterprise applications.

Update 5/16/17: Blackberry is working with at least two automakers on security software that would monitor the car's operating system and warn the driver if the system has been hacked. This is going to be very important in the future as self-driving cars become more plentiful. The system is currently being tested by Aston Martin and Range Rover. The virus software would cost drivers $10 a month. Blackberry software is already running in millions of cars. Shares exploded higher.

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. Shares were crushed by the drop in the networking sector ahead of the Cisco earnings. Cisco beat on earnings but guided for a sharp decline in revenue.

We were stopped out for a minor gain on the stock position and the option position will move to the Lottery Play section.

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.

Update 5/5/17: Nice gain on unusual option activity. More than 6,800 May $24 calls traded against an open interest of 2,800, which means they were bought at around 75 cents each. Another 2,000 May $25 calls were bought at 45 cents. That is a total of $600,000 in premium when the normal volume is only a couple hundred contracts. Somebody is betting big on a short fuse with only two weeks to go.

Position 4/25/17:

Closed 5/17/17: Long FNSR shares @ $23.10, exit $23.95, +.85 gain.


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

HZNP - Horizon Pharma - Company Profile


No specific news. Excelent relative strength with a minor gain in a weak market.

Original Trade Description: May 15th.

Horizon Pharma Public Limited Company, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of orphan diseases, arthritis, pain, and inflammation and inflammatory diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and malignant osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; PROCYSBI for the treatment of nephropathic cystinosis; QUINSAIR for the treatment of chronic pulmonary infections due to pseudomonas aeruginosa in cystic fibrosis patients; and KRYSTEXXA to treat chronic refractory gout. Its products also include RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus, and multiple other indications; DUEXIS to treat signs and symptoms of osteoarthritis and rheumatoid arthritis; MIGERGOT for the treatment of vascular headache; PENNSAID 2% to treat pain of osteoarthritis of the knees; and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis. The company has collaboration agreements 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; and Alliance for Lupus Research (ALR) to study the effect of RAYOS on the fatigue experienced by systemic lupus erythematosus (SLE) patients. Company description from FinViz.com.

Horizon reported earnings of 21 cents that missed estimates for 25 cents. Revenue of $220.9 million rose 8% but missed estimates for $253 million. They guided for full year revenue of $1.0 to $1.035 billion, down from $1.26 billion. Analysts were expecting $1.4 billion. Shares were crushed for a 39% drop from $15.50 to $9.50.

Earnings July 31st.

However, the company said the declines in earnings and revenue were due to a change in business practices and how they contract with pharmacy benefit managers. To combat this change the company is changing its cost and pricing structure to better match the new contract requirements.

Secondly, they said they were expsnding investments in the drug Krystexxa and they raised sales expectations from $250 million to $400 million for the full year. They also signed a deal to acquire River Vision and its Thyroid Eye Disease drug for $146 million and the acquisition will close immediately. They also received approval from a supplemental New Drug Application (NDA) for Ravicti, a drug for urea cycle disorders in children.

Horizon has a portfolio of orphan drugs with more on the way. The shares were hammered but they are already rebounding strongly on what some investors are seeing as a buying opportunity.

Position 5/16/17:

Long HZNP shares @ $10.75, see portfolio graphic for stop loss.

Optional: Long June $11 call @ 55 cents, see portfolio graphic for stop loss.

STM - STMicroelectronics - Company Profile


No specific news. Major profit taking knocked us back into a loss on the stock position. We were stopped out at $16.25 for a 9 cent loss. I am recommending we reload this position with a trade at $16.25.

Buy STM shares with a trade at $16.25.

Original Trade Description: May 6th.

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. Company description from FinViz.com.

STM is Europe's third largest semiconductor maker. They posted a surge in revenue growth after six years of declines thanks to IoT, phones, automotive and industrial demand. Revenue is expected to grow 12.3% in Q2 and the company said it was on track to meet 2017 objectives. The CEO said, "Entering the second quarter, we continue to see healthy demand, with strong booking trends across all our product groups and regions."

They reported revenue of $1.821 billion that rose 12.9% and matched analyst estimates. Earnings of 12 cents missed estimates for 14 cents. The company said it would webcast its Capital Markets Day on Thursday.

Earnings July 27th.

Shares closed at a new high on Friday and the turnaround excitement is building. A positive analyst day on Thursday could send it higher. Shares rallied from November through February and then went dormant in Mar/Apr. Now that the consolidation is complete, they are surging again.

Position 5/8/17:

Closed 5/17/17: Long STM shares @ $16.34, exit $16.25, -0.09 loss.

Still open: Long July $17.50 call @ 65 cents, no initial stop loss.

USO - US Oil Fund ETF - ETF Profile


Oil prices rose slightly after the EIA report showed inventories declined -1.8 million barrels.

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.

Update 5/8/17: Saudi's oil minister, Khalid al-Falih, said "after conversations with participants, I am confident the production cut agreement will be extended for another six months and possibly beyond." The OPEC meeting is May 25th and we should be getting almost daily headlines ahead of that event.

Position 4/24/17:

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

WLL - Whiting Petroleum - Company Profile


No specific news. Only a minor drop with the market.

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.

WTW - Weight Watchers - Company Profile


No specific news. Only a minor decline and all at the open. No intraday weakness.

Original Trade Description: May 13th.

Weight Watchers International, Inc. provides weight management services worldwide. The company operates in four segments: North America, United Kingdom, Continental Europe, and Other. It offers a range of products and services comprising nutritional, activity, behavioral, and lifestyle tools and approaches. The company also engages in the meetings business, which presents weight management programs, as well as allows members to support each other by sharing their experiences with other people experiencing similar weight management challenges. In addition, it offers various digital subscription products, including Weight Watchers OnlinePlus and a weight management companion for Weight Watchers meeting members to digitally manage the day-to-day aspects of their weight management plan, as well as provides interactive and personalized resources that allow users to follow weight management plan. Further, the company provides Personal Coaching, an online subscription product that offers one-on-one telephonic, e-mail, and text support and personalized planning from a Weight Watchers-certified coach, as well as offers access to other online tools. Additionally it offers various products, including bars, snacks, cookbooks, food, and restaurant guides with SmartPoints values, Weight Watchers magazines, SmartPoints calculators, and fitness kits, as well as third-party products, such as activity-tracking monitors. The company also licenses the Weight Watchers brand and other intellectual property in frozen foods, baked goods, and other consumer products, as well as endorses selected branded consumer products; and engages in publishing magazines, as well issues other publications, such as cookbooks, and food and restaurant guides with SmartPoints values. It offers products through its meeting and franchisee business, as well as online. Weight Watchers International, Inc. was founded in 1961. Company description from FinViz.com.

Weight Watchers posted a Q1 profit of 16 cents compared to estimates for a 4-cent loss. Revenue of $329.1 million rose 7.2% and beat estimates for $323 million.

Subscribers rose 16% to 3.6 million. Subscribers have now risen for 5 straight quarters. This is the first time since 2011 that they gained subscribers for a full year. The company raised guidance for the full year to $1.40-$1.50. Analysts were expecting $1.27. They said they were off to a strong start thanks to the Oprah Effect. The TV personality joined the brand late in 2016.

Earnings August 1st.

The stock has been a rocket since Oprah began pitching for the brand but it is showing no signs of fading. The post earnings spike to $25 saw some post earnings depression but shares are already moving back to that post earnings level. I believe female investors are betting on the Oprah Effect to continue driving profits. Even at this level the stock is not overly expensive with a PE of 17.

I am recommending it because it has refused to decline in a weak market. The risk is less with the option position.

Position 5/15/17:

Long WTW shares @ $24.48, see portfolio graphic for stop loss.
Optional: Long July $26 call @ 90 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

ERA - Era Group - Company Profile


No specific news. Nice intraday dip to a new low and no rebound at the close.

Original Trade Description: May 8th.

Era Group Inc. provides helicopter transportation services primarily to the oil and gas exploration, development, and production companies. Its helicopter services include emergency response search and rescue; air medical services; Alaska flightseeing tours; and other services, as well as utility services to support firefighting, mining, VIP transport, power line, and pipeline survey activities. The company also leases helicopters to third parties and foreign affiliates; engineers, manufactures, and distributes after-market helicopter parts and accessories; and provides classroom instruction, flight simulator, and other training services. As of December 31, 2016, the company owned, leased, or managed a total of 136 helicopters, including 13 heavy helicopters, 49 medium helicopters, 33 light twin engine helicopters, and 41 light single engine helicopters. It also serves cruise line passengers. Company description from FinViz.com.

Era reported a loss of 27 cents on revenue of $54.5 million. This was the second quarterly revenue decline but revenues have been weakening for the last two years. The last quarter they posted positive earnings was June 2016 and the losses are growing. In this table from Capital Cube all the numbers look terrible.

Earnings August 1st.

I am frustrated because I almost recommended them in the weekend newsletter. I decided to wait until support broke at $11.50. That support failed today with a big drop. I believe the shares are going to retest the November lows at $7.50. After looking at that table above would you buy this stock?

Position 5/9/17:

Short ERA shares @ $10.69, see portfolio graphic for stop loss.

No options recommended because of wide spreads.

VXX - Volatility Index Futures - ETF Description


Big spike in the VXX for obvious reasons. However, we know the volatility will not last and there will be another new low in our future.

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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