Option Investor

Daily Newsletter, Wednesday, 7/19/2017

Table of Contents

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

Market Wrap

Another Bullish Opex (so far)

by Keene Little

Click here to email Keene Little
It's a rare event when opex is not bullish and this one is no exception to the pattern. But the bulls will need to shoo the bears away on Thursday and Friday in order to prevent a possible topping pattern.

Today's Market Stats

All-time highs beget new all-time highs. That's basically the message from the market and the market pundits. Momentum is weakening and the gains are slowing but they're still gains. And the new all-time highs get people excited and want to join in before missing the ride higher.

The excitement about new highs and a typically bullish opex has the market's major indexes pushing higher this week and that could continue into at least August. But as always, there are some reasons why it might pay to be careful about chasing the market higher from here. I'll explore some of the reasons for caution in tonight's charts.

Helping the market push higher is a strong advance-decline line, which shows liquidity is plentiful as more money/investors chase the market higher. It's one of the few places where people are happy to buy something at the highest price in hopes they'll be able to sell someday at an even higher price, which is why high prices often beget higher prices.

But as we all know, chasing the market higher has its own risks, one of which is the fact that the buyers at the highs could be left holding the bag. Whether or not we're there is arguable and certainly the bears know that shorting a market that "shouldn't be rallying" is a recipe for disaster.

We have no indications that the market could even be close to an important high and while I believe we could be, it's important to remember that setups for a high are far different than confirmations of a high. For those who love to enter a short position at top tick or get long at bottom tick, the vast majority of traders are unable to do that. When it happens it's usually pure luck while it's much more common for bottom and top pickers to sustain trading losses. And those are not made up in volume (wink).

Having said all that, I'll show in tonight's charts why it might be a good time to pick a top, ideally with one more thrust higher Thursday morning that is then reversed and the day finishes with a bearish candlestick, such as a shooting star. This is obviously speculation but it's something that would help confirm a possible high.

Coming into this week I liked the price patterns on the indexes for a high in opex week. I thought we could see a high by Friday, maybe next Monday, and that would also coincide with a new moon this coming Sunday. I've noticed many important highs on new moons (+/- 3 days) so we have that possibility.

It was a slow news day so there's not much to discuss about why the market is doing what it's doing so I'll just jump into the review of the charts, starting with a weekly view of SPX.

S&P 500, SPX, Weekly chart

Again, sorry for the busy weekly chart but important price levels and trend lines are shown and SPX has now reached the bottom of a potentially important price zone. With today's high near 2474 SPX is within less than a point from a price projection at 2475, which is where the 3rd through 5th waves of the rally would equal 162% of the 1st wave.

A rally much above 2475 would open the door to two price projections near 2507 and 2516. Considering SPX typically closes opex week around a multiple of 25, I was thinking we'll see a close near either 2475 or 2500 and we'll find out in the next two days which it will be.

S&P 500, SPX, Daily chart

The wave pattern for the rally from either the March of April low have price projections that are essentially on top of each other at 2475.54 and 2476.91. These shorter-term price projections line up nicely with the weekly projections and with a wave count that can be considered complete at any time now, it will be important for the bulls to power this index up through 2477 to open the door to 2500.

Key Levels for SPX:
- bullish above 2477
- bearish below 2410

S&P 500, SPX, 60-min chart

Drilling in closer to the price pattern, the leg up from July 6th is likely the final one for the rally from March/April, which should conclude the rally from January 2016. So it's a potentially important top that could be made. The rally from July 6th is a 5-wave move and the 5th wave equals the 1st wave at 2474.64, about a point higher than today's high.

We have the 60-min, daily and weekly patterns all pointing to 2475-ish for a potentially important high for this rally. Based on all this I think it's very important not to chase the market higher. At least let the bulls prove it with a sustained rally above 2477, in which case I'd look for at least 2490-2500.

Volatility index, VIX, Weekly chart

Coming into this week, with the expectation we'd see SPX make it higher, I thought we'd see the VIX drop down to record lows below the June low at 9.37, which matches lows made in December 1993 (9.37) and December 2006 (9.39). But VIX is marginally higher than last week's close at 9.51 but still below 10.

There is simply no fear in this market. If the VIX can make it down to the bottom of its bullish descending wedge (with bullish divergence), we'll see it drop down to 9 before potentially bottoming. Put protection is really cheap right now and a good time to at least add some insurance to protect your long positions. You buy car, life and home/property insurance hoping to never have to need it. The same should be true for your investments.

Dow Industrials, INDU, Daily chart

The Dow is showing a little more upside potential than SPX and could drag SPX above the key level at 2477. It doesn't have to make a new high from here but the first upside target is the trend line along the highs from May 2011 - December 2014, currently near 21720 (using the arithmetic prices scale).

If the Dow makes it up to the top of a rising wedge pattern for its rally from June 29th we could see it reach 21775 by Friday/Monday. The top of a larger rising wedge, for the rally from April, will be near 21830 by next Monday. A sustained rally above 21840 would be a bullish breakout (bears would need to stay in hibernation).

Key Levels for DOW:
- bullish above 21,840
- bearish below 21,279

S&P Midcap 400 index, MID, Daily chart

The chart of MID is looking like a clean setup for a high soon and likely this week, possibly with a quick jab higher Thursday morning. The rising wedge for the rally from March fits very well as the 5th wave of the rally from January 2016 and the bearish divergence since last November helps confirm the bearish interpretation of the pattern. The top of the wedge is near 1783 and if we get a little throw-over above the wedge that's then followed by a collapse back down into the wedge we'd have a good sell signal.

It's possible MID might chop its way a little higher into early August (light-green dashed line) and that's why it's important for the bears to see a break below the July 6th low at 1729 before they'll have confirmation a high is in place. But at the moment it's looking like a good setup for a high (ideally with one more push higher Thursday morning).

Key Levels for MID:
- bullish above 1800
- bearish below 1729

Nasdaq Composite index, COMPQ, Daily chart

The Nasdaq's trend line along the highs from April 2016 - March 2017 stopped rallies in May and again on June 26th. It had made it above the trend line in early June but was unable to hold above the line. Today's rally is another test of the trend line, currently near 6388.

The Nasdaq turns more bullish above 6400, in which case the trend line along the highs from April 2016 - June 2017 could be the upside target. It will be near 6530 by the end of the month. At the moment it's a setup for the completion of the rally from February 2016 but proof will obviously be something more than a corrective pullback.

Key Levels for NDX:
- bullish above 6400
- bearish below 6081

Russell-2000, RUT, Daily chart

The RUT has finally made it up close to its trend line along the highs from 2007-2015, currently near 1442 (today's high was 1441.77). This trend line stopped rallies in December 2016, February, April, June and now here we are again in July. The weekly chart has been showing bearish divergence since the first test in December and as you can see on the daily chart below, there is bearish divergence since April and further weakness compared to the June 9th high.

The price pattern following the March 22nd low is a rising wedge, which accounts for all the 3-wave and corrective price structure within the wedge. The bearish divergence also helps confirm the bearish interpretation of the pattern. The wave count can be considered complete at any time now and therefore my expectation is that the 2007-2015 trend line will once again hold as resistance (game on for a test of that theory).

The final leg of the rising wedge pattern (wave-v) often does a little throw-over above the top of the wedge and we could therefore see the RUT make a stab above the line before collapsing back down. That would be a sell signal if it happens. If the RUT is able to sustain a rally above a price projection at 1450 it would be a confirmed bullish breakout above the rising wedge. Short against that level is the play since it provides a good risk vs. reward play. Just be sure to honor your stop if it rallies above 1450.

Key Levels for RUT:
- bullish above 1450
- bearish below 1398

Russell-2000, RUT, 60-min chart

Supporting the fact that the RUT might have topped out today is the short-term pattern for the leg up from July 6th. It should be a corrective wave count inside a wedge pattern and without getting into the gritty details of the wave pattern, today's rally achieved a price projection for two equal legs up from July 13th to complete the second a-b-c of a double zigzag wave count. Now we wait to see if the bears will recognize a handout when they see one.

I'm not seeing enough evidence in some of the other indexes that I like to cover, such as the Treasury yields and banks, that gives me a strong enough clue about what the next move is likely to be. Yields have been coming back down since the July 7th highs, probably out of concern that the inflation and economic data does not support further rate hikes.

Those same concerns have been hurting the banks, which have been underperforming the S&P since July 6th. The concern about banks is that lower rates will hurt their profitability. But so far the moves in each could be just corrections and it's difficult to say whether or not this month's move will continue or reverse.

Transportation Index, TRAN, Weekly chart

This week the TRAN has been relatively weak compared to the Dow and this follows the possibility that last week's high completed a 5-wave move up from January 2016. There's not enough evidence yet that the TRAN made an important high so it's too early to call. But with a 5-wave move it can be considered complete at any time now.

The TRAN found support today at its 20-dma, as it did back on June 21st, which led to a rally to new highs. That could happen again and as shown on the weekly chart below, there is a price projection at 9823 for the 5th wave of the rally from January 2016. Last Friday's high was near 9764.

U.S. Dollar contract, DX, Daily chart

On Tuesday the US$ dropped below support near 94.80 and unless it's reversed quickly we could see a drop to price-level S/R near 93. I show an expectation for the start of a larger bounce correction into August/September but that requires the dollar to get back above 94.80 sooner rather than later.

The weekly chart shows vulnerability down to about 90, which is where I'm expecting the dollar to head before starting a much stronger rally, but the next couple of days should tell us whether or not the dollar is going to make a bee line down to 90 or instead after a larger bounce correction. At the moment the dollar is more oversold than it's been since its April 2011 low (a major low that led to the 5-year rally into the January 2017 high).

Gold continuous contract, GC, Daily chart

Gold dropped to price-level support near 1205 on July 10th and has made a pretty good bounce off the low at 1204. It has made it back above its 20- and 200-dma's, which nearly crossed on Monday at 1234 and 1233, resp., and now it's looking like it wants to test its 50-dma, near 1248 (Tuesday's high was 1244).

Above 1250 would open the door to its downtrend line from September 2011 - July 2016, which stopped the rally into the June 6th high, as well as its broken uptrend line from December 2016 - May 2017. The lines cross near 1280 in mid-August.

But if gold rolls back over from here and MACD curls back over from the zero line it would create a sell signal.

Oil continuous contract, CL, Daily chart

Oil's bounce off its June 21st low led to a back-test of its broken 50-dma on July 3rd and at the same time it tested the 50% retracement of its May-June decline, both near 47 at the time. A pullback from there has now led to another bounce back up 47 but at least this time the bulls were able to break above the 50-dma, currently near 46.60.

If oil can push higher there is the 62% retracement at 48.20 and then a price projection at 48.92 for two equal legs up from June 21st, which matches up with the 50-week MA at 48.95. Above 50 would open the door to a run up to the downtrend line from May 2015 - January 2017, currently near 52.90. My expectation is for oil to continue lower, either from here or the $49 area.

Economic reports

Thursday morning we'll get the Philly Fed index, unemployment claims and Leading Indicators, none of which is expected to move the market. The market will be left to react to overseas news and opex influence.


Several of the major indexes have reached important levels together and the price patterns for each suggest we could be making an important high at any time. There are some cycle studies pointing to early- to mid-August but the price patterns are at the point where the rally could fail at any time. It's a time for caution about the upside while thinking about downside protection/speculation.

For SPX I see upside potential to the 2500-2520 area but only if it can hold above 2477. It's a good proxy for the broader market so keep an eye on it. I also like the pattern for MID and its rising wedge is another warning sign to not get complacent about the upside. The uber-low VIX is already a warning sign that too many are feeling complacent about the rally.

Opex could finish on a high note, if the rally doesn't fail from here, in which case watch for the possibility of a high next Monday. We have a new moon on Sunday and while I would never place a bet based on the moon's phase, I've seen too many important market highs on/around the new moon to simply dismiss it as astro-voodoo. With a price pattern that's matching up price with time I think we should be alert to the idea that we're topping sooner rather than later.

Proof of course will be price action -- a sharp decline that drops below the July 6th lows would confirm an important top is in place. Stick with the uptrend until it breaks but now's a good time to keep the exit door propped open and try to be the first one out before the crowd hits the narrow doorway.

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

Keene H. Little, CMT

New Plays

Once in a Decade

by Jim Brown

Click here to email Jim Brown
Editor's Note

Goldman Sachs called this stock a "once in a decade" opportunity. While that may be a little extreme, it has given the stock some positive momentum.


NTNX - Nutanix - Company Profile

Nutanix makes infrastructure invisible, elevating IT to focus on the applications and services that power their business. The Nutanix enterprise cloud platform leverages web-scale engineering and consumer-grade design to natively converge compute, virtualization and storage into a resilient, software-defined solution with rich machine intelligence. The result is predictable performance, cloud-like infrastructure consumption, robust security, and seamless application mobility for a broad range of enterprise applications.

Expected earnings August 24th.

Nutanix announced last week that its business in Canada had grown 75% over the 12 months prior to the quarter end. They increased their customer base from 179 customers to 313. There was also a record number of customers that invested $1 million or more into Nutanix infrastructure products.

Goldman added the stock to their conviction buy list saying there was a 53% upside potential. Goldman called Nutanix a '"hyperconverged infrastructure company," a "once-in-a-decade tech infrastructure story," as they see strong adoption of the technology among chief information officers. Based on a survey Goldman did in June they found that 18% of CIOs expected to move to this technology over the next two years with Nutanix the leader in the field. They also said the company could easily be an acquisition target because of their size and revolutionary technology.

Buy NTNX shares currently $24.41, initial stop loss $21.65.
Alternate position: Buy Oct $30 call, currently $1.50, Initial stop loss $21.65.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 at the market open.


No New Bearish Plays

In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown

Editors Note:

The bulls are running and bears are being trampled. All the major indexes posted new highs today with the exception of the sector indexes for biotechs, transports and semiconductors. This "should" be a bullish signal for traders but it may only be temporary. Remember, August and September are the worst months of the year. Once we get past option expiration and into the first week of August, I would be looking for market weakness.

The Russell 2000 posted a major breakout thanks to the financials and the tech stocks. If the Russell can hold its gains and add to them we might be able to avoid that August weakness.

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

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Iron Condors = Couch Potato Trader

BULLISH Play Updates

BOX - Box Inc - Company Profile


No specific news. Shares broke through resistance at $19.50. Now it needs to hold.

Original Trade Description: July 17th.

Box, Inc. provides cloud content management platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries primarily in the United States. The company was formerly known as Box.net, Inc. and changed its name to Box, Inc. in November 2011. Company description from FinViz.com.

Expected earnings August 30th.

Box is making a lot os smart moves lately. The recently partnered with Microsoft to jointly offer Box cloud management to Azure enterprise customers. Box will use Azure as a strategic public cloud platform and the companies have committed to share go-to-market investments, including initiatives to co-sell Box with Azure. Any time you can get Microsoft to partner with you, share the expenses and market your product, it was a good move.

Last week Box appointed Stephanie Carullo as the new COO. Carullo led U.S. sales for Apple's education business. Before that whe led the data center and virtualization architecture group at Cisco Systems. That is a good pedigree.

Shares have ticked up since both of those events last week and could be headed for a breakout over $19.50.

Position 7/18/17:

Long BOX shares @ $19.21, see portfolio graphic for stop loss.
Alternate position: Long Sept $20 call @ 90 cents, see portfolio graphic for stop loss.

HZNP - Horizon Pharma - Company Profile


No specific news. Minor gain, would have liked to have seen more.

Original Trade Description: July 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.

Expected earnings August 7th.

Horizon posted and earnings disappointment in May that saw the stock collapse from $15.50 to $9.50. They reported earnings of 21 cents that missed estimates for 25 cents. Revenue was $220.9 million and missed estimates for $248 million. They guided for the full year for revenue of $1.0 to $1.03 billion. The problem was a shift in the contracting model with pharmacy benefit managers that was not performed in accordance with expectations.

That contracting problem has been solved. They also announced that three patents cases against Dr Reddy's, Lupin Ltd and Mylan Labs were upheld by a US District Court, which will prevent generics for VIMOVO until 2022 at the earliest.

Horizon is small company with numerous drugs in the pipeline and in trials. Shares are recovering from the May disaster and there is still $2.50 to gain to fill the gap from the post earnings crash.

Position 7/17: Alternate position:
Long Aug $14 call @ $.50, see portfolio graphic for stop loss.

BEARISH Play Updates

FRGI - Fiesta Restaurant Group - Company Profile


No specific news. Only a minor rebound from the new 4-year low.

Original Trade Description: July 12th.

Fiesta Restaurant Group, Inc., through its subsidiaries, owns, operates, and franchises fast-casual restaurants. It operates its fast-casual restaurants under the Pollo Tropical and Taco Cabana brand names. The company's Pollo Tropical restaurants offer various Caribbean inspired food, and Taco Cabana restaurants offer a selection of Mexican food. As of January 1, 2017, it had 177 company-owned Pollo Tropical restaurants, 166 company-owned Taco Cabana restaurants, and 29 franchised Pollo Tropical restaurants in the United States, Puerto Rico, Panama, Trinidad & Tobago, Guatemala, the Bahamas, Venezuela, and Guyana, as well as 5 franchised Taco Cabana restaurants located in New Mexico, 2 non-traditional Taco Cabana licensed locations on college campuses in Texas, and 1 location in a hospital in Florida. Company description from FinViz.com.

Expected earnings August 7th.

On May 8th, Fiesta reported earnings of 25 cents compared to estimates for 30 cents. Revenue of $175.6 million missed estimates for $178.2 million. Same store sales declined -6.7% at Pollo Tropical and transactions declined -8.9%. Sales at Taco Cabana decreased 4.5% and sales transactions fell -4.0%. The company closed 30 stores that were losing money.

The company is under attack by JCP Investment Management, which has a 3% stake. JCP had lobied for changes to be voted at the June shareholder meeting. The company and JCP have been trading hostile press releases. The shareholder meeting went in favor of Fiesta but JCP is not giving up. Shares began to decline further when JCP did not gain control of the board.

Shares closed at a 4-year low on Wednesday at $18.80 and the IPO price in 2012 was $11. Shares had traded as high as $69. With the chain closing stores at a rapid pace, their long term future is in doubt.

Position 7/13/17:

Short FRGI shares @ $18.75, see portfolio graphic for stop loss.
Alternate position: Long September $17.50 put @ $1.05, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


New closing low.

We are nearing the point where the ETF will do a 1:4 reverse split. That will be an excellent opportunity for us to get short again at a higher level.

Barron's is reporting current short interest at 59 million shares out of 66 million outstanding.

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.

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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