Editors Note:

Sometimes you make the right decision based on facts and sometimes it is a hunch. The facts told us not to risk a new play entry on Wednesday morning.

The setup ahead of the Fed announcement was simply too risky and I did not recommend any new plays on Tuesday evening. Today the Dow opened down -164, rallied to +65 and then crashed -290 after the Fed announcement and struggled to end at -223. That is the definition of intraday volatility. The Dow has now moved more than 200 points per day, in alternating directions for the last four days.

After the close today Ebay disappointed, Qualcomm disappointed and Facebook knocked the ball out of the park. S&P futures opened at +6 and within an hour had declined to -7 where they are holding.

It would appear we are going to open lower but there is a lot of darkness left before morning. Anything can change and often does.


No New Bullish Plays


AMBA - Ambarella

Ambarella develops full motion HD video chips for video capture, sharing and display worldwide. The system on a chip handles HD video, audio, image processing and system functions on one chip. Their largest customer is GoPro.

GoPro (GPRO) reported two weeks ago that holiday sales have been dismal and would report Q4 revenue of $435 million, down -31% from the year ago quarter. Analysts were expecting $512 million and that number had already been lowered by analysts fearing sales were declining.

GoPro said it was cutting 7% of its workers and would incur up to $10 million of restructuring expenses in 2016.

Ambarella shares tanked along with GoPro despite having numerous other customers that also buy their chips. Unfortunately, GoPro is their biggest customer by far. In the prior quarter, Ambarella missed estimates for "near-term headwinds" which translates to "GoPro cameras are not selling." This means the current quarter that they will report on March 3rd is not likely to be any better. There is probably an earnings warning lurking in the near future.

GoPro is being hampered by a flurry of new competitors at cheaper prices. This means competition is only going to get worse and GoPro has already cut its prices twice in the last 3 months. All of this means GoPro is losing market share and that means fewer Ambarella chips will be needed.

With Apple shares crashing and estimates for Q1 iPhone sales declining by about 20%, this is going to put a cloud over the entire personal electronics market.

Ambarella is not overpriced with a PE of 13. They are just too reliant on GoPro for the majority of their revenue. If Ambarella could accelerate some purchases by their other customers, the stock would recover quickly. Apparently that is not yet happening and shares are about to decline to an 18-month low under $35.

Earnings March 3rd.

With AMBA trade at $35.75

Buy March $32.50 put, currently $2.45, initial stop loss $40.55

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now