Option Investor

Daily Newsletter, Wednesday, 10/11/2017

Table of Contents

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

Market Wrap

Bullish Consolidation

by Keene Little

Click here to email Keene Little
The stock market has made very little headway in the past week as it has chopped mostly sideways. But the choppy consolidation fits as a bullish continuation pattern and while there might not be much more to the upside before a larger correction it remains a bullish market.

Today's Market Stats

Today was more of the same as we've seen over the past week. Neither side is showing much conviction and trading volume has been lighter than normal. But a choppy consolidation with low volume keeps things aligned for the bulls and we should see another leg up for the rally, potentially into next week (opex). It could be the last of the rally from August but for now that's speculative and the bulls remain in control of the tape.

Not much happened in news today and economic reports were slim. The market appeared to be worried about some geopolitical news (like N. Korea launching a missile or having a missile launched at its launch pad) but remained hopeful that today's FOMC report would provide a catalyst to get things moving again. While this afternoon's FOMC minutes didn't provide much for the market to act on there was at least a positive reaction (or perhaps stated more accurately, there wasn't a negative reaction and that keeps things looking bullish).

The market gyrated a little around the release of the minutes at 14:00 before climbing a little more and making new highs for the day (except the weaker RUT but it did get a bounce off its afternoon low). The new highs today, wait for it, meant more new all-time highs for the blue chips (a whopping penny above yesterday's high for the S&P 500). The tech indexes came close to new highs above yesterday morning's but they'll need another bump up to accomplish the "new all-time highs."

The FOMC minutes did not provide new information and reinforced what we already knew. Some Fed heads were uncomfortable raising rates any further in light of inflation running below their 2% target (although it's easily argued that inflation is actually significantly higher). Other Fed members argued they were more worried about not getting ahead of an overheated economy (I'm not sure where they're looking), which in turn could heat up inflation.

Some Fed members are worried that last week's wage numbers show they should be worried about wage inflation turning into inflation for the general economy. The nonfarm payrolls report showed an increase in wages earned and an unemployment rate that dropped. But at the same time employment shrank by 33K and something doesn't compute. I think it's much more likely that the hurricanes caused a loss of jobs for lower-paid service workers, which in turn boosted the average wages for the remaining workers. As for the unemployment rate, I'll be kind and say it doesn't reflect reality.

If the Fed is worried about wage inflation I think they're once again not looking at the right metrics. We know their economic models are highly inaccurate (it's why they've never been able to issue an accurate forecast for the economy). One of these days the Fed will finally get the boot and it can't come soon enough. I now relinquish my soap box to the next speaker.

So the Fed is still intent on raising rates, likely in December (although the minutes show that it's not assured since they remain data dependent), and then more next year if their measurements of the economy continues to support further rate increases. They of course would like higher rates so that they have room to lower them again during the next recession. While they're raising rates they've also begun their AQE (anti-QE) by not renewing the first $10B of bonds that matured last week.

In the bigger picture of liquidity $10B is a mere drop in the punch bowl but between rate increases and taking a small step to remove the punch bowl it's surprising the market hasn't started to react more negatively. That's certainly indicative of bullish enthusiasm for this market, regardless of what's going on behind the scenes or under the surface (clue the sound track from "Jaws").

The bulls continue to draw in additional support while bears remain mostly absent in the market, although there are some early signs of a crack in the foundation the bulls are standing on. The latest Investors Intelligence report showed bulls back above 60% while bears have dropped to 15%, which gives us a difference of 45%. This spread has been a reliable indicator in the past that the market is peaking. It doesn't mean the market will turn back down from here but the risk is high and it's a good time for bulls to shed their coat of complacency and tread carefully.

Along with a historically low VIX I've been watching the CNN Fear & Greed (F&G) index for sentiment clues. Last Wednesday I showed the FNG chart with SPX to point out the warning from an uber-high reading of 92, which climbed to 95 on Thursday, and how it's generally a little early in identifying the top to a market. This makes sense since a market high is often created when the market simply runs out of buyers buying the highs, which is also a reason for concern about the declining volume during the rally (shown further below with the QQQ chart).

The F&G index has now dropped back down a little (83 today) and I've updated last week's chart to show the turn back down, which is the warning sign. As you can see on the chart, when the F&G index turns down from an Extreme Greed reading, tops are generally found soon thereafter. There is of course the potential for a turn down in the F&G index to be followed by another turn up to a higher reading but interestingly, the move up from August shows a 5-wave move and suggests a top for the F&G index is now in place.

To reiterate the problem for bulls here, the F&G index is coming off a high not seen in the past 3 years (as far back as the chart goes) and that means the coming correction could be worse than we've seen in a while. October's volatility still awaits us.

SPX vs. CNN Fear & Greed index

Another warning sign comes from the declining trading volume since the August rally began. The low volume during the consolidation over the past week is bullish but a rally needs volume to show support for the move. As you can see on the QQQ chart below, Declining volume with a drop in the F&G is a double warning sign that tells us the rally is running out of fuel.

QQQ daily chart

Adding to the bull's woes is the fact that new 52-week highs have dropped off sharply since the rally has continued this month. Even with the almost-daily new all-time highs (or near new highs for the tech indexes) we're seeing less participation of the stocks in the indexes, always a warning sign. At the same time the new 52-week lows are starting to tick higher.

While we have plenty of warning signs that this bullish run since August could soon complete, the short-term pattern supports the likelihood for another push higher, either into the end of this week or into next week if we see the consolidation continue into the end of this week. We might even see a sharp pullback on Thursday/Friday to set up the rally into opex. It's been common to see a head-fake move down at the end of the week before opex. It's been a favorite way for big hedge funds to suck in the shorts (for short-covering fuel into opex) while loading up on call options and selling puts). Watch for that possibility on Thursday/Friday of this week. And with that I'll jump into the chart review of the indexes.

S&P 500, SPX, Weekly chart

Last week SPX made it back up to the trend line along the highs since April 2016 (ignoring the poke above the line in February 2017), which is now also crossing the midline of the up-channel for price action from 2010-2011. This week's tiny candle is on the line. In the big rally from 2009 the rally from February 2016 is the 5th wave and it's typical for the 5th wave to finish at/near the midline of the channel and we wait to see if the rally will continue or start a reversal back down.

With SPX getting pinched in a rising wedge for the rally from 2016 we're soon going to find out whether or not we'll see a continuation of the rally in a stronger blow-off move or if instead the rally (from February, and in turn from 2009, is coming to an end. If SPX can successfully climb above 2580 I'd be more inclined to believe the bullish scenario but let's just say I'm not a believer in that potential.

S&P 500, SPX, Daily chart

The 5th wave of the leg up from January/February 2016 is the leg up from April and the 5th wave of the rally from April is the leg up from August. From an EW perspective we're running out of waves for this bull market and it's the reason I've become so bearish -- the coming correction is going to be huge and complacency is going to hurt a lot of buy-and-holders. That's of course just my opinion but I see a greater risk for bulls now than I did in October 2007, fwiw.

Looking at the leg up from August, it's not a clear wave pattern but as I had pointed out in previous wraps, I'm waiting to see if we'll get a full 9-wave (impulsive) move up or if the 9th wave will be missing, like it was at the October 2007 high. Ideally we'll get a little larger corrective pattern off the October 5th high, as depicted on bold green, and then a final push higher into next week. But if it continues to chop marginally higher from here we could see a top get put in place sooner rather than later. As indicated on the chart, SPX stays bullish inside the up-channel from August, so above 2535, which also means we'd have a bearish heads up below 2535.

Key Levels for SPX:
- bullish above 2535
- bearish below 2488

S&P 500, SPX, 60-min chart

The parallel up-channel for the rally from August is shown on the 60-min chart below and you can it's been riding up the midline of the channel the past two days. It's been a weak effort to get to new highs this week and if continues to work its way slowly higher it might not be able to make it up to the top of the channel, which will be near 2580 by the end of the day Friday. That would actually be a bearish setup for opex.

It's been common to see a head-fake move down at the end of the week prior to opex and it's one reason why I'm thinking we could see a spike down as early as Thursday morning to then set up the rally into next week. As long as the up-channel holds a pullback I'd be a buyer of the dip for a trade (only one more leg up so don't hang on too long).

Dow Industrials, INDU, Daily chart

The has been nudging higher against a trend line along the highs for it rally from August and against an uptrend line from November 2016 - May 2017. Both trend lines are approaching the top of a parallel up-channel for the rally from April, currently near 22910. It's a similar position as SPX, which means we could see a quick pullback and then higher into next week or the rally could literally finish any day now. Unless we see a strong break through these trend lines, with volume, I think upside potential is significantly dwarfed by downside risk. Playing defense and protecting profits on long positions seems to me to be the smarter play right now.

Key Levels for DOW:
- bullish above 23,100
- bearish below 22,420

Nasdaq-100, NDX, Daily chart

The pattern for the tech indexes is not clear enough for me to make price projections but there a few trend lines to keep an eye on. Since last Thursday it has not been able to get above the broken uptrend line from June-November 2016 (green line) and only a little higher is the top of a parallel up-channel for its rally from August, currently near 6118. Two equal legs up from August is at 6099, all of which says NDX could have strong resistance from about 6090 to 6120. If it can get through that area it would then have to soon deal with its trend line along the highs since November 2014, currently near 6155. It stays bullish for now but I don't see enough upside potential (famous last words) to think about new long positions.

Key Levels for NDX:
- bullish above 6130
- bearish below 5840

Russell-2000, RUT, Daily chart

The RUT has been consolidating in a bull flag pattern off last Thursday's high. It has worked its way over to the bottom of its up-channel for the rally from August. The consolidation fits as the 4th wave correction in the rally and that calls for one more leg up to complete the 5th wave. If another leg up completes near the midline of the up-channel we could see a high around 1530 as early as next Monday. If it stays bullish all next week we could see the RUT make it back up to the top of its up-channel, which will be near 1570 by opex. The final 5th wave of a long-term rally is the most unreliable and could fail anywhere, including a truncation (no new high) and therefore I'd be very careful chasing the RUT higher -- have good stop management.

Key Levels for RUT:
- bullish above 1515
- bearish below 1452

30-year Yield, TNX, Daily chart

The pattern for Treasury yields since the December 2016 high looks like a bull flag pattern but I'm not convinced yet that we're going to see a bullish breakout. The first bullish move for the 30-year yield (TYX) would be a climb above its broken 50- and 200-week MAs, currently crossing at 2.93. Its 200-dma is at 2.92 and all were tested with Monday's high at 2.933.

There's price-level support near 2.85 and as long as that holds as support and TYX can break above 2.93 I'd be more bullish. It would need to punch through some more resistance and get above its December 2016 high near 3.2 before I'd turn more bullish but that's certainly the potential from here. Otherwise a drop back below support at 2.85 could lead to another leg lower.

The big question in my mind is what Treasuries will do if the stock market falls on hard times. Will there be a flight to safety in Treasuries, driving prices higher and yields lower? That would be a typical scenario but I readily admit this is not a normal market.

KBW Bank index, BKX, Weekly chart

The banks have been strong off September 7th low and as can be seen on the weekly chart of BKX, it rallied from another back-test of its broken trend line along the highs from 2010-2015 and now is back up to the top of its parallel up-channel from 2009. Even though it has made a minor new high above its February 2017 high it's showing bearish divergence at the new high. As with the major indexes, I see the potential for at least a little higher into next week but this is looking ready for a top and it's likely to be a major one.

U.S. Dollar contract, DX, Daily chart

The US$ has a 3-wave bounce off its September 8th low into last Friday's high and the 2nd leg of the bounce achieved 162% of the 1st leg at 93.92 with the high at 94.10. It was a good setup for a reversal back down if there's to be one more new low near 90 before it will be ready for a stronger rally. But at the moment it has pulled back to support at the bottom of its original down-channel from January and its recovered 20- and 50-dma's, all of which are now crossing near 92.75.

If 92.75 holds as support we could see another push higher and create an impulsive move up from September. That would in turn tell us a bottom is likely in place. But if it drops below 92.75 it would increase the odds in favor of a drop to 90. In any case I think the dollar is close, if not already there, to a bottom that should lead to a rally into next year.

Gold continuous contract, GC, Daily chart

With the small pullback in the dollar we've seen a bounce for gold and it's now up against resistance at its broken 20-dma near 1293. Only slightly higher is its broken 50-dma, near 1301, and price-level S/R near 1300. If gold can get through this resistance it will look more bullish, especially since it's coming off a back-test of its broken downtrend line from 2011-2016. If the dollar does continue to drop down towards 90 we should see gold break through resistance (and just the opposite if the dollar continues higher).

Oil continuous contract, CL, Daily chart

Last Friday and again on Monday oil used its 50-dma as support and got a good bounce back up on Tuesday. It consolidated today, which could be bullish but until oil can get above its September 28th high at 52.86 I think there's a good chance oil will be heading lower from here. Better confirmation of a move lower would be a drop back below its broken downtrend line from February, currently near 48.30, although a drop below last Friday's low at 49.10 would be an indication that it will drop back below the trend line.

Economic reports

Thursday morning's economic reports include unemployment claims data and Fed-watched PPI numbers, which are expected to have ticked higher from August. This will likely be written off by the Fed as "transient" because of higher gas and oil prices following the hurricane-related shutdowns.


The major indexes look like they could work their way higher from here but it would look better if we see a further pullback and then higher next week. The EW price pattern would look better that way and it would fit well for new highs into opex. If we do get another rally into opex I suspect it's going to be the last hurrah for this bull market, which means the bears could be on deck here. We'll have time to evaluate that potential a week from now.

With the excessive number of bulls vs. bears, waning momentum and volume, a price pattern that looks near complete and resistance levels not far away I think it's a very risky time to chase any move higher from here. Having said that, a jab to the downside on Thursday/Friday could be a good setup to trade the long side into opex. But if it in fact will be the final 5th wave of the rally it's important to keep in mind how unreliable this wave can be (anywhere from missing or truncated to extending much higher in a blow-off move).

Trading on the long side from here is subject to higher-than-normal risk since a big move back down could start with a scary gap down some morning, trapping a lot of bulls and getting bears chasing the move lower. We have the risk of no buyers showing up if everyone starts to dump their ETF positions en masse.

We're at the point where I think you'll need to sell into a decline if we see a strong decline at any time (something more than a couple hundred points for the Dow) since there will likely be very few and only small bounce attempts. This is why I think downside risk dwarfs upside potential. But we're not there yet and the bulls continue to control the tape. Keep respecting the upside as long as the bulls maintain their grip.

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

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

New Plays

Sun Going Down

by Jim Brown

Click here to email Jim Brown
Editor's Note

The sun is going down on this company and it will be painful.


No New Bullish Plays


JKS - Jinko Solar - Company Profile

JinkoSolar Holding Co., Ltd., together with its subsidiaries, engages in the design, development, production, and marketing of photovoltaic products in the People's Republic of China and internationally. It offers solar modules, solar cells, silicon ingots, silicon wafers, and recovered silicon materials. The company sells its products to distributors, project developers, and system integrators under the JinkoSolar brand, as well as on an original equipment manufacturer basis. JinkoSolar Holding Co., Ltd. was founded in 2006 and is based in Shangrao, the People's Republic of China. Company description from FinViz.com.

Expected earnings Dec 6th, unconfirmed.

Declining demand for certain types of solar panels, new requirements in China, new rules in China and an excess of supply in the market is depressing Jinko shares.

Of the last five analyst actions, 2 have been a cut back to hold and 3 have been a cut to sell. Axiom cut them to sell with a $10 price target.

To make matters worse, on Sept 27th, the company announced an "at the market" offering of $100 million in stock. That represents about 5 million shares in addition to their 27 million shares outstanding. At the market means the selling broker will simply sell the shares into the market at a time and pace of their own choosing. Average daily volume is about 800,000 so assuming they sold 100,000 shares per day it would take 50 trading days of continuous selling pressure.

Over the last month the consensus earnings estimates for the full year have declined from $1.99 to 77 cents. Estimates for the quarter have declined from 41 cents to 17 cents. Axiom said estimates should turn negative for Q4 and remain negative all the way through 2019.

Unfortunately, the outlook is so negative the put options are very high. This will be a stock only position.

Sell short JKS shares, currently $22.69, initial stop loss $24.25.

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

In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P, Nasdaq and Russell gains have stagnated at resistance. The Russell is holding in the 1,505-1,510 range, Nasdaq just under 6,600 and S&P 2,540-2,550. The indexes are primed for a breakout but we need a catalyst. Hopefully the bank earnings on Thr/Fri will be that catalyst. The Russell is 17% financially weighted. Strong results from the big banks could trigger a breakout rally while disappointments could trigger the reverse. The markets are holding their gains while we wait.

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

FDC - First Data
The short stock position was closed at the open.

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

AMD - Advanced Micro Devices - Company Profile


No specific news. Shares muved slightly higher as analysts continue to talk about the processor conference.

Original Trade Description: Sept 23rd

Advanced Micro Devices, Inc. operates as a semiconductor company worldwide. Its primarily offers x86 microprocessors as an accelerated processing unit (APU), chipsets, discrete graphics processing units (GPUs), and professional graphics; and server and embedded processors, and semi-custom System-on-Chip (SoC) products and technology for game consoles. The company provides x86 microprocessors for desktop PCs under the AMD A-Series, AMD E-Series, AMD FX CPU, AMD Athlon CPU and APU, AMD Sempron APU and CPU, and AMD Pro A-Series APU brands; and microprocessors for notebook and 2-in-1s under the AMD A-Series, AMD E-Series, AMD C-Series, AMD Z-Series, AMD FX APU, AMD Phenom, AMD Athlon CPU and APU, AMD Turion, and AMD Sempron APU and CPU brand names. It also offers chipsets with and without integrated graphics features for desktop, notebook PCs, and servers, as well as controller hub-based chipsets for its APUs under the AMD brand; and AMD PRO mobile and desktop PC solutions. In addition, the company provides discrete GPUs for desktop and notebook PCs under the AMD Radeon brand; professional graphics products under the AMD FirePro brand name; and customer-specific solutions based on AMD's CPU, GPU, and multi-media technologies. Further, it offers microprocessors for server platforms under the AMD Opteron; embedded processor solutions for interactive digital signage, casino gaming, and medical imaging under the AMD Opteron, AMD Athlon, AMD Sempron, AMD Geode, AMD R-Series, and G-Series brand names; and semi-custom SoC products that power the Sony Playstation 4, Microsoft Xbox One, and Xbox One S game consoles. Company description from FinViz.com.

Expected earnings Oct 24th.

Nvidia (NVDA) shares were rocked last week after news broke that Tesla was looking at moving to AMD and away from Nvidia for the chips to power the autonomous driving functions. The initial headline saw AMD spike and Nvidia decline. The actual story is that AMD and Nvidia are partnering on creating a chip solution for Tesla. It is no surprise that AMD is in the mix because Tesla hired Jim Keller to lead development of Autopilot. Keller previously worked at AMD and led the development of the Zen architecture and the new Ryzen processors.

It appears that Nvidia and AMD have a team of about 50 engineers working to develop a comprehensive solution for Tesla. Here is where it gets interesting. I would not be surprised to see Tesla make an acquisition bid for AMD. The company only has a $13 billion market cap compared to $110 billion for Nvidia. AMD has a lot of products that are different from the Nvidia product line even though they both make GPUs. AMD has only existed for years as a foil for Intel. The bigger company could not be considered a monopoly as long as AMD existed. Now with Qualcomm getting into the processor market and AMD and Nvidia in a high tech partnership, it would make sense for Nvidia to acquire AMD. Since GPUs are a small part of AMD's product line, there may not be that much regulatory concern. Is it a long shot? Absolutely, but definitely in the realm of possibilities.

Even if there is never an acquisition bid, just the combination of AMD and Nvidia in a partnership validates the technical capabilities of AMD and lifts them into the big league. Where AMD has always been a low cost alternative to Intel and always 1-2 generations behind in technical expertise, they have dramatically improved their game in the last 12-18 months. Instead of being road kill on the Intel superhighway to state of the art processors, they have surged to be a real competitor. Partnering with Nvidia is a real step up for the company.

The chart is ugly with no apparent trend but there is decent support at $12. They could easily catch fire as investors begin to understand the ramifications of the partnership and we could see another leg higher like the one that started the prior May. There are no guarantees but I do not believe anyone sees AMD's future as anything but positive given recent events.

Update 9/25/17: AMD and Nvidia declined after Intel announced the next generation in the Core CPU line for desktops. This 8th generation Core-i7-8700K is the bet gaming processor ever with an internal clock frequency of 4.7 Ghz and Intel's fastest ever. They will also support 4K video. This is a challenge for AMD but the company is still ahead of Intel in the GPU race.

Update 10/3/17: AMD announced a new embedded GPU requiring less power and capable of driving five simultaneous 4K displays. The GPU requires less than 40 watts TDP and comes in a smaller, thinner package. The chip has a 1.25 TFLOPS speed and comes in three form factors including MCM, MXM and PCI Express. The 4K and 3D support works for games, medical imaging, advertising signage and industrial uses. The GPU has 4 GB of GDDR5 memory. Shares gained more than 5% on the news.

Update 11/10/17: AMD shares rallied after a processor conference and upgrade to Nvidia. Yesterday there was an article with a picture of a new Intel processor with "Vega Inside" but it has disappeared today. Intel has previously denied any licensing with AMD but the picture showed a mobile processor with Intel Outside, Vega Inside, which would mean AMD's Vega graphics on an Intel chip. This was for a mobile processor for a notebook or tablet. Apparently, Intel was not ready for the world to see that internal graphic and the article was removed from circulation. If/when Intel does announce a deal with AMD the stock is going to soar.

Update: I was able to go back and find the link I had saved even though it is no longer on the website. Vega Inside

Position 9/25/17:

Long AMD shares @ $13.25, see portfolio graphic for stop loss.
Alternate position: Long Jan $14 call @ $1.25, see portfolio graphic for stop loss.

BOTZ - Global X Robotics AI - Company Profile


No specific news. Long term position.

Original Trade Description: October 4th.

The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Global Robotics & Artificial Intelligence Thematic Index. The fund invests at least 80% of its total assets in the securities of the underlying index. The underlying index is designed to provide exposure to exchange-listed companies in developed markets that are involved in the development of robotics and/or artificial intelligence as defined by Indxx, the provider of the underlying index. The fund is non-diversified. Company description from FinViz.com.

Robots of every description are taking over the manufacturing sector, service sector, etc. Drones are automated. Autos are becoming autonomous.

Even more important to this ETF is the sudden arrival of Artificial Intelligence or AI. That is the buzzword for everything. Everybody is trying to get into the AI business.

This ETF took off last January and while there have been several mild hiccups along the way, the chart is nearly vertical as investors become aware of it.

I am going to lag back on the stop loss because this could be a long-term position.

Position 10/5/17:

Long BOTZ shares @ $22.10, see portfolio graphic for stop loss.
Alternate position: Long Mar $23 call @ 80 cents, see portfolio graphic for stop loss.

DVAX - Dynavax - Company Profile


No specific news. Minor decline but support at $22.50 is holding.

Original Trade Description: Sept 20th

Dynavax Technologies Corporation, a clinical-stage immunotherapy company, focuses on leveraging the power of the body's innate and adaptive immune responses through toll-like receptor (TLR) stimulation. Its product candidates are being investigated for use in multiple cancer indications, as a vaccine for the prevention of hepatitis B and as a disease modifying therapy for asthma. The company's lead product candidates include HEPLISAV-B, an investigational adult hepatitis B vaccine, which is in Phase III clinical trials; and SD-101, an investigational cancer immunotherapeutic that is in Phase I/II studies. Its product candidates also comprise AZD1419, which is in Phase II clinical trial for the treatment of asthma; DV230F that is in preclinical stage for the treatment of liver tumors; and DV1001, a TLR 7&8 agonist, which is in preclinical stage for the treatment of for multiple malignancies, as well as DV281 for the treatment of non-small cell lung cancer. It has collaboration and license agreements with AstraZeneca AB to develop AZD1419 for the treatment of asthma; and Merck & Co. to develop SD-101 for varios immuno-oncology therapies. Company description from FinViz.com.

Dynavax has a vaccine for Hepatitis B. Shares crashed on August 10th when the FDA asked for more information despite a 12-1 vote to approve it. The results of the request for info will be released no later than November 10th according to the company. They are confident the drug will be approved and they are already targeting an early 2018 release date.

Cathy Reese of Empire Asset Management said investors should use the current volatility to buy the stock and she has a $38 price target.

Earnings Nov 1st.

Shares have rebounded from the early August dip as investors become more confident the vaccine will be approved. Shares peaked a $21.85 on September 11th and then faded for a week as profit taking appeared. Wednesday's close was a 7-day high.

I am not planning on holding this position into the announcement. I would like to exit by the end of October to avoid any unplanned declines.

Update 10/2/17: Shares spiked nearly $2 on news it was considering strategic alternatives on its Hep-B vaccine. Those would include selling the drug to someone else or licensing it to a larger company. DVAX is a small company and does not have the infrastructure to market it on a worldwide basis. The drug Hellisav-B is expected to receive FDA approval in the coming weeks. Whichever route they take would provide upfront cash to enable them to continue development on their immuno-oncology pipeline.

Options are very expensive because of the big expectations. This will be a stock only position.

Postion 9/21/17:

Long DVAX shares @ $21.10, see portfolio graphic for stop loss.

HPE - Hewlett Packard Enterprise - Company Profile


No specific news. Shares are holding at the resistance highs.

Original Trade Description: Oct 2nd

Hewlett Packard Enterprise Company provides technology solutions to business and public sector enterprises. It operates through Enterprise Group, Software, Enterprise Services, and Hewlett Packard Financial Services segments. The Enterprise Group segment offers servers, management software, converged infrastructure solutions and technology services; hybrid cloud solutions, including private cloud platform; business critical systems; storage products, as well as 3PAR StoreServ, a Storage platform; and networking products comprising switches, points, controllers, routers, and wireless local area network and network management products. This segment also provides software-defined networking and communications capabilities; network access solutions for mobile enterprises; and consulting services. The Software segment offers software to capture, store, explore, analyze, protect, and share information and insights within and outside organizations; enterprise security, application delivery management, and IT operations management software products. This segment provides HP Vertica, an analytics database technology for machine, structured, and semi-structured data; and HP IDOL, an analytics tool for human information, as well as solutions for archiving, data protection, eDiscovery, information governance, and enterprise content management. The Enterprise Services segment offers consulting, outsourcing, and support services across infrastructure, applications, and business process domains; and application and business services that help clients to develop, revitalize, and manage their applications and information assets. The Hewlett Packard Financial Services segment provides leasing, financing, IT consumption and utility programs, and asset management services. Company description from FinViz.com.

Expected earnings Dec 5th.

HPE has been undergoing an intense reorganization for several years. That included splitting off from HPQ in an effort to separate the corporate business from the consumer business. Meg Whitman has done a superb job in trimming excess departments and selling off non-core assets.

Recently, she announced another 10% reduction in the workforce that would result in 5,000 job cuts. She said the reductions would result in fewer lines of business and a more streamlined decision process. The current 3-year plan calls for savings of $1.5 billion and shift the focus towards research and development.

When Whitman took over in 2011 Hewlett Packard had 350,000 workers before the spinoff. Now HPE has 52,000.

The company now specializes in cybersecurity, enterprise WiFi, cloud services, servers and other corporate technology. Whitman recently said the company is seeing rapidly growing demand across key areas of the business.

Shares closed at a new high on Monday after trading in a $2 range for almost a year. I believe the latest announcement on reductions and streamlined operations has finally struck a chord with investors.

Update 10/3/17: Shares down slightly on news they allowed Russia to examine the source code of security software used to guard Pentagon secrets. The review was required by Russia and other countries prior to those countries considering HPE as a cybersecurity vendor for their secrets. However, by letting Russian software engineers view the source code, supposedly to make sure there was no hidden back door access for US spies, they learned how the code worked, what the software was guarding against and gave them insights as to how they could defeat it. The top White House cyber security official said this was becoming a bigger problem because everyone (other countries) was demanding to see the source code and that has now become a security risk.

Position 10/3/17:

Long HPE shares @ $14.97, see portfolio graphic for stop loss.
Alternate position: Long Jan $16 call @ 50 cents, see portfolio graphic for stop loss.

KTOS - Kratos Defense - Company Profile


No specific news. Only 61 cents from a new high.

Original Trade Description: August 14th.

Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products; satellite communications; technical and training solutions; modular systems; and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial, ground, and seaborne, as well as command, control, and communications systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers; and critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation, and petro-chemical industries, as well as government and military customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.

Kratos builds drones for target practice for the U.S. military. They are also building drones for combat for air to air and air to land. They also provide communication systems for missiles, satellites and various other platforms.

China and Russia are rapidly militarizing space and Kratos is working with the U.S. military to improve satellite communication to defend against attacks. The DoD is currently spending a lot of money to prepare for war in space. Kratos owns and operates a global satellite demonitoring business with revenues rising 61% in Q1.

Kratos has so many new programs in operation it would be impossible to list them here and several of them are secret programs for unnamed clients.

Kratos guided for a return to profitability in Q2 and sharply rising revenue for the full year. Shares spiked 30% in the four weeks after Q1 earnings. Their next report is August 3rd. I am recommending we buy an option and hold over the report. If the earnings are as positive as they teased in the Q1 report we could see another sharp reaction. This company is in all the right places for the increase in defense department spending.

Kratos unveiled its newest high performance class of military unmanned aerial system technology at the Paris Air Show. The XQ-222 Valkyrie and UTAP-22 Mako drones provide fighter like performance and are designed to function as wingmen to manned aircraft in contested airspace. The Valkyrie can carry various weapons and intelligence systems and has a range of 3,000 miles. The Mako is designed to carry sensors and stealthily infiltrate hostile airspace to gather intelligence. Both are designed to operate with or without manned flights. The Air Force recently pitched the functions of the Valkyrie saying a F-35 with a group of fighter/bomber drones could maximize control of airspace and ground attack operations. The F-35 can select targets and pass information to specific drones while maintaining situational awareness from a stealthy and relatively safe position.

Just over the last couple weeks Kratos announced a $2.9 million order for an airborne communications system, a $10 million order for a ballistic missile defense system, $23 million for a military radar system and $8 million for a GPS Satellite protection system. Analysts are expecting a record $800 million in revenue for 2018. They expect to do $150 million in unmanned revenues in 2018.

Kratos posted earnings of 1 cent and a $10.4% increase in revenue to $186 million. They guided to be free cash flow positive by $25 million in 2017.

Expected earnings Oct 26th.

With the daily new contract awards shares have risen $1.50 in the last week and closed at a 5-week high on Monday. They are very close to breaking out to a new high.

Update 9/5/17: New high in a weak market. Unfortunately, after the close they announced a secondary offering of 12.5 million shares that will increase the float by 14%. If I recommended we sell at the open on Wednesday, we are going to get hit with the normal "sell the news" decline. If we retain the position, stocks normally rise after a secondary is completed. We can either take a loss on Wednesday or hang on for a bigger gain later. I am recommending we hold the position. I am removing the stop loss to avoid being knocked out of the position for a loss. Shares declined to $12.80 in afterhours, a drop of $1. If that is all the decline we get, I would be very happy.

Update 9/6/17: KTOS announced a $46 million contract with the Saudi Royal Navy to assist in increasing military communications and preparedness. They also announced the QWK Integrated Solutions LLC, a partnership of multiple defense firms had won a $3.038 billion five year contract. The partnership will provide for rapid development and integration of space, missile defense, cyber, directed energy and related technologies to support SMDC/ARSTRAT and the warfighter.

Update 9/11/17: The company announced it had successfully completed a required number of missions with their jet powered unmanned drone system. The missions are part of the performance demonstrations prior to delivery of ten drones over the next six months. The customer was not announced for security reasons. However, a program they announced with the Navy several months ago called for delivery of 10 drones in 2017 with the potential for multiple follow on orders in 2018. This could be part of that project.

Update 9/18/17: Kratos deployed the first fully autonomous vehicle in Colorado with the Colorado Dept of Transportation. The robot vehicle replaces the trailing vehicle in a work construction crew. It follows the crew throughout the day and acts as a mobile crash barrier. Previously, a CDOT employee had to drive a specially built truck mounted with impact absorbing rear bumpers. Basically, this protects the work crew on the road by giving erratic drivers something to hit other than the work crew. There is still the problem of the driver in this truck when a car, truck or semi plows into the truck at 70 mph. In Colorado these bumper trucks were hit an average of 7 times per year, sometimes with injury to the CDOT drivers. The Kratos robotic crash guard truck has no driver so nobody is injured with an errant civilian vehicle crashes into it. The robot vehicle monitors the work crew and maintains a safe distance behind them with enough lane coverage to keep them from getting hit.

Update 9/21/17: KTOS successfully completed the third test of AN/SPY-6(V) Air and Missile Radar (AMDR) against a live ballistic missile target. The new radar is slated to begin service on the Navy's next generation Arleigh Burke Class Guided Missile Destroyer currently under development. This is a big step for Kratos.

Position 8/15/17:

Long KTOS shares @ $12.78, see portfolio graphic for stop loss.
Alternate position: Long Nov $15 call @ 65 cents, see portfolio graphic for stop loss.

With shares just crossing the $12.50 strike price, we had to reach out to $15 and a distant month.

MRVL - Marvel Technology - Company Profile


No specific news. Shares are holding at the record high close from a week ago. Resistance at $18.50 still holding.

Original Trade Description: August 30th.

Marvell Technology Group Ltd. designs, develops, and markets analog, mixed-signal, digital signal processing, and embedded and standalone integrated circuits. It offers a range of storage products, such as hard disk drive (HDD) and solid-state drive controllers, as well as HDD components, such as HDD preamps components; and develops software enabled silicon solutions consisting of serial advanced technology attachment port multipliers, bridges, serial attached SCSI, and non-volatile memory express redundant array of independent disks controllers and converged storage processors for enterprise, data centers, and cloud computing businesses. The company also provides networking products comprising Ethernet solutions comprising Ethernet switches, Ethernet physical-layer transceivers, and single-chip network interface devices; and embedded communication processors. In addition, it offers a portfolio of connectivity solutions, including Wi-Fi, and Wi-Fi/Bluetooth integrated system-on-a-chip products, which are integrated into a variety of end devices, such as enterprise access points, home gateways, multimedia devices, gaming products, printers, automotive infotainment and telematics units, and smart industrial devices. Further, the company provides printer-specific standard products, as well as full-custom application-specific integrated circuits; and communications and applications processors. Company description from FinViz.com.

Marvel reported earnings of 30 cents that beat estimates for 28 cents. Revenue of $605 million beat estimates for $601 million. Free cash flow more than doubled from $38 million to $89 million. Core revenues rose 6%, storage controller revenues rose 13%. SSD chips rose from 20% to 25% or revenue. The new SSD products are rapidly gaining market share and remain a high profit item. Gross margin was 60.4%. They guided for Q3 for revenue of $595-$625 million with earnings of 30-34 cents per share.

Expected earnings Nov 23rd.

The company is in the midst of a restructuring process while they are changing their product mix for the better. Apparently it is working.

Shares spiked from $15.75 to $17.25 after earnings then pulled back slightly on post earnings depression. They rebounded today to a new 2-month high and very close to a new high.

Position 8/31:

Long MRVL shares @ $17.79, see portfolio graphic for stop loss.
Alternate position:
Closed 10/9: Long Oct $18 call @ 64 cents, exit 64 cents, breakeven.

ON - ON Semiconductor - Company Profile


No specific news. Shares posted only a minor gain but a new closing high.

Original Trade Description: Oct 9th.

ON Semiconductor Corporation manufactures and sells semiconductor components for various electronic devices worldwide. It operates through three segments: Power Solutions Group, Analog Solutions Group, and Image Sensor Group. The Power Solutions Group segment offers discrete, module, and integrated semiconductor products for various applications, such as power switching, power conversion, signal conditioning, circuit protection, signal amplification, and voltage reference. The Analog Solutions Group segment designs and develops analog, mixed-signal, and logic application specific integrated circuits and standard products, as well as power solutions for a range of end-users in the automotive, consumer, computing, industrial, communications, medical, and aerospace/defense markets. This segment also provides trusted foundry, trusted design, and manufacturing services, as well as integrated passive devices technology. The Image Sensor Group segment offers complementary metal oxide semiconductors and charge-coupled device image sensors, as well as proximity sensors, image signal processors, and actuator drivers for autofocus and image stabilization for a range of customers in automotive, industrial, consumer, wireless, medical, and aerospace/defense markets. The company serves original equipment manufacturers, distributors, and electronic manufacturing service providers. Company description from FinViz.com.

Earnings Nov 6th, unconfirmed.

ON continues to power higher on a surge of new products as the IoT boom continues. The company completed the acquisition of Fairchild Semiconductor in September.

A major factor in the boom is the Advanced Driver-Assistance Systems. This market is expected to reach $42 billion by 2021 according to MarketsandMarkets. This is giving ON a tremendous boost in earnings and forecasts.

However, they missed earnings for Q2. They reported 26 cents and estimates were 33 cents. Revenue of $1.34 billion beat estimates for $1.31 billion. The company guided for the current quarter for $1.34-$1.39 billion.

Somebody believes they are going to beat those estimates by a mile. On Monday, somebody bought 11,000 of the November $20 calls at 65 cents. That is a $715,000 bet. I suggest we follow them.

Because of the steep gains over the last month, I am not recommending a stock position. We will do this with options only.

Update 10/11/17: ON and Fujitsu announced an agreement where ON will purchase 40% of Fujitsu's 8-inch wafer fabrication plant in Aizu-Wakamatsu. The purchase will be completed by April 1st. ON already had a 10% share and will acquire another 30%. ON said it planned to increase ownership to 80% in the second half of 2018 and 100% in the first half of 2020. By scaling into the ownership it will allow ON to add capacity as demand increases.

Position 10/10/17:

Long Nov $20 call @ 80 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

FDC - First Data - Company Profile


No specific news. We closed the short stock position at the open. The long put position is still open and will move to the Lottery Play section this weekend.

Original Trade Description: September 16th.

First Data is a global leader in commerce-enabling technology, serving approximately six million business locations and 4,000 financial institutions in more than 100 countries around the world. The company's 24,000 owner-associates are dedicated to helping companies, from start-ups to the world's largest corporations, conduct commerce every day by securing and processing more than 2,800 transactions per second and $2.2 trillion per year. Company description from FDC.

First Data earnings will be impacted by the three hurricanes because retail activity was slowed significantly over the weeks following the hurricane impacts. FDC said retail activity declined 72% in the first three days and was not expected to resume significantly for weeks. Stores need to recover from the floodwaters and flooding. They need electricity restored in order to run registers and POS terminals.

Expected earnings Nov 6th.

FDC also had the unfortunate luck of filing for a secondary offering of 85 million shares with an overallotment allowance of another 12.75 million on September 11th, just after the twin storms. The shares were sold by New Omaha Holdings, a major shareholder in FDC. With only about 300 million shares actively traded that is close to a 25% increase in the float. The shares were priced on Sept 18th at $17.75 each.

Selling nearly 100 million shares when your shares are already depressed would be expected to depress them even further. Shares closed at $17.55 on Wednesday and the 4-month low close is $17.47. Any further decline could put them into free fall to major support at $15.

There is always the potential for an earnings warning over the next several weeks.

Update 9/28/17: FDC announced a new service called Disburse-to-Debit to allow companies that hire temporary workers or "gig" workers to pay them instantly upon completion of a task by sending the money to their debit cards. This works for people like Uber drivers, part time workers at special events or even insuranve companies paying claims. An agent can upload the user data and the debit card payment arrives instantly. This is a smart service and FDC shares rallied 33 cents on the news.

Position 9/28:

Closed 10/11/17: Short FDC shares @ $17.56, exit $17.90, -.34 loss.
Alternate position: Long Jan $17 put @ 70 cents, see portfolio graphic for stop loss.

VIPS - Vipshop Holdings - Company Profile


No specific news. Minor decline back to the four-year low close.

Original Trade Description: October 7th.

Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People's Republic of China. It offers a range of branded products, including women's apparel, such as casual wear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas, and maternity clothes; men's apparel comprising casual and smart-casual T-shirts, polo shirts, jackets, pants, and underwear; women and men shoes for casual and formal occasions; and accessories consisting of belts, fashionable jewelry, watches, and glasses for women and men. The company also provides handbags, such as purses, satchels, duffel bags, and wallets; apparel, gear and accessories, furnishings and decor, toys, and games for boys, girls, infants, and toddlers of all age groups; sports apparel, and sports gear, and footwear for tennis, badminton, soccer, and swimming; and skin care and cosmetic products, including cleansers, lotions, face and body creams, face masks, sunscreen, foundations, lipsticks, eye shadows, and nail polish. In addition, it offers home furnishing products comprising bedding and bath products, home decors, and dining and tabletop items; small household appliances; designer apparel, footwear and accessories; and snacks, health supplements, and occasion-based gifts, such as chocolates, moon-cakes, and tea. Further, the company provides consumer financing, supply chain financing, and wealth management services. The company provides its branded products through its vipshop.com, vip.com, and lefeng.com Websites, as well as through its cellular phone application. Company description from FinViz.com.

Vipshop is in the flash sale business. That means other retailers bring them products they cannot sell and Vipshop marks down the price and runs a special flash deal special to clear out the inventory. Vipshop has been around for nearly 10 years and did very well in the early years. Unfortunately, profits are fading because manufacturers and other retailers can now unload their products on Amazon and Alibaba without the valuation haircut that occurs with Vipshop.

Earnings for the recent quarter were 17 cents and estimates were 19 cents. Revenue rose 30% to $2.58 billion. They filled 84.8 million orders.

Expected earnings Nov 15th.

The problem was rising costs. Margins declined in what Vipshop called a highly promotional market with higher advertising costs in hopes of gaining market share. If you translate that sentence it means they had to cut prices to generate the sales and they had to pay more for advertising to lure customers into the sale process.

With Alibaba's growth surging well beyond the optimistic estimates by analysts, they are taking over the online sales channel in China. This does not bode well for Vipshop in the future. Add in the Amazon monopoly in the US and Vipshop has nowhere to go to escape the rapidly growing retail cloud. The flash sales business has died in the US after a flood of competitors surged into business and then quickly disappeared.

Shares closed at a four-year low on Friday at $8.35 with the next support level around $2.50.

Position 10/9/17:

Short VIPS shares @ $8.36, see portfolio graphic for stop loss.
Alternate position: Long Nov $8 put @ 40 cents, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


Since this is a long-term position, there will not be daily commentary.

Original Trade Description: September 18th.

The VXX is a short-term volatility ETF 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 five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

We know from experience that the VXX always declines. The last two times we shorted this ETF we had a $7.23 and $5.98 gain.

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 into year-end we could see a sharp decline in the VXX over 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.

The VXX is hard to short. Shortsqueeze.com says there are 19.9 million shares short out of 26.7 million shares outstanding. The shares are out there and being traded because the volume on Monday was 29.6 million. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.

I had held off after the 1:4 reverse split because the options were expensive and I was expecting volatility in September from the budget battle and debt ceiling hurdle. With those issues pushed out into December, the volatility is dropping like the proverbial rock. Several readers have already emailed me asking when I was going to put this position back in the portfolio.

Position 9/19/17:

Short VXX shares @ $40.95, see portfolio graphic for stop loss.

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