In This Issue:
Dear Momentum Stocks Weekly Subscriber,
The bears got the win last week despite the bulls’ best attempts to even the score on Friday. The weakness in the small-caps from the start of the session was a major concern, as was the late-day fade that dragged tech closer to a breakdown.
Volatility has remained somewhat subdued following the choppy September trading range, but the action will likely heat up as the month winds down this week and with October waiting in the wings.
The Dow advanced 113 points, or 0.7%, to finish at 16,314 on Friday. The blue-chips traded in positive territory throughout the session to reach a peak of 16,465. The bulls pushed resistance at 16,350-16,400 but failed to hold these levels into the closing bell. If cleared and held, additional resistance is at 16,600, followed by 16,750-16,800. Short-term support is at 16,200-16,000. A close below the latter would be a bearish setup that could lead to 15,800-15,600.
The S&P 500 slipped a point, or 0.05%, to end at 1,931. The index tested resistance at 1,940-1,950 after trading to a high of 1,952 on Friday. A close above 1,950 would be bullish for a run to 1,960 and possibly 1,970-1,975. However, the late-day fade to 1,921 and close below 1,935 for the second-straight session is a concern. Support at 1,925-1,920 held, with risk to 1,900-1,875 on a close below the latter.
The Nasdaq dropped 48 points, or 1%, to settle at 4,686. Tech made a run to resistance at 4,800 after testing 4,785 on the open. The 51-point pop faded by Wall Street’s lunch break, with the bears pushing a low of 4,659. Backup support at 4,675-4,650 held on the close below 4,700, with risk to 4,600 on a drop below the latter.
The Russell 2000 fell 15 points, or 1.3%, to close at 1,122. The small-caps tapped 1,146 on Friday’s open but needed to clear and hold resistance at 1,140-1,150. Despite a good effort, the index showed weakness shortly after the open before a late-day breakdown to 1,119. The close below 1,125 was a bearish signal that could lead to 1,110-1,100 over the near term.
The S&P 500 Volatility Index ($VIX, 23.62, up 0.15) closed above 23.50 after trading to a high of 24.29. The bulls held the 25 level, but they face risk to 30-35 if the bears can hold this level. Last week’s intraday highs reached 26.29 on Tuesday and 25.30 on Thursday. A close below 22.50-20 this week would be a bullish sign for October.
The Dow ended August at 16,528 and needs 214 points to finish September in the green. The technical picture remains weak for the blue-chips, as all of the major moving averages are sloping lower. The 50-day moving average is still in a rapid descent and is showing no signs of leveling out anytime soon. While it is possible that a retest to 16,600-16,800 could occur, a close below 16,000 is more likely, and that would be the signal to go “short.”
I’m targeting the SPDR Dow Jones Industrial Average ETF (DIA, $162.88, up $1.01) for a bearish trade on a break below 16,200-16,100. The DIA October 155 puts (DIA151016P00155000, $1.05, down $0.23) could be used for a short-term trade, but they expire in less than three weeks. This makes the trade a little risky, as DIA would need to be below $154 by mid-October for the trade to break even. A move below $153 would represent a double from current levels but would require a 700-800 point drop on the Dow.
The DIA November 150 puts (DIA151120P00150000, $1.80, down $0.18) would allow more time for a trade to play out, but these puts are also a tad expensive. The breakeven point is at $148.20, technically, by mid-November, and that would require the Dow to drop roughly 1,500 points. These options will still make money if the Dow drops 500-600 points over the near term, but, with the premiums so high, a triple-digit return might be a lot to ask for.
I covered bearish S&P 500 trades last week, and the index needs to make up 41 points to get back to even for September. The prior week’s run to 2,020 and a steepening 50-day moving average appear to have made a short-term top, with last week’s high topping out at 1,979. The “death cross” that formed in late August shows no signs of getting better. The bears pushed a low of 1,908, and a drop below 1,900 would be the signal to go short.
The Nasdaq made another run at 4,900 and resistance at the 200-day moving average, but it got weaker as the week progressed and made lower highs and lower lows. To make matters worse, a death cross is close to forming, as the 50-day moving average is just a 6-pack away from falling below the 200-day moving average. The index is down 90 points for the month after starting at 4,776.
The best way to trade this would be to use the PowerShares QQQ Trust (QQQ, $102.92, down $0.88). The 50-day moving average is less than $1 from falling below the 200-day moving average and confirming a death cross. All of the major moving averages are starting to curl lower, and resistance is at $105, followed by $106-$106.50. Friday’s high reached $105.01, with the low checking in at $102.28. A move above $102-$100 could lead to a retest of the mid to low $90s.
The QQQ October 98 puts (QQQ151016P00098000, $0.85, up $0.10) were active on Friday, as more than 2,000 contracts traded. The puts traded to a low of $0.48 before surging to a high of $1.06. There is an opportunity to trade these puts if $102 is breached, but we will need to be quick to take profits if backup support at $100 holds.
The QQQ November 90 puts (QQQ151120P00090000, $0.80, up $0.05) are nearly $13 out of the money, but they were active on Friday, as well. More than 5,400 contracts exchanged hands, with a range of $0.93-$0.59. These put options provide more time for a breakdown in tech, and half profits could be taken on a drop below $100. If this level holds as support, traders could then set a stop to protect profits.
The Russell 2000 closed lower every day last week and has fallen in six-straight sessions. The death cross that formed at the beginning of the month was confirmation that lower lows would be in store. The small-caps came into the month north of 1,159 and are now down 47 points, or 4%. The lower highs last week and Friday’s low for the month are sure signs that a retest to 1,100-1,075 is likely.
I have been talking about the 1,100 level needing to hold on the Russell since mid-August and how a close below this level could lead to another round of panic-selling. For the Nasdaq that level is 4,500.
While I covered the best way to play a breakdown in tech by using the QQQs, we can also take advantage of a possible selloff in the small-caps. The iShares Russell 2000 ETF (IWM, $111.42, down $1.49) appears to have peaked for the month at $118.55 following a run to a still-sloping 50-day moving average.
Aggressive traders could target a move to the $110-$108 area for a possible payday by going short with the IWM October 105 puts (IWM151016P00105000, $0.75, up $0.08).
The IWM November 100 puts (IWM151120P00100000, $1.15, up $0.10) are also worth a look if $110 fails to hold. These options would double if IWM falls below $97.70, technically, by late November. The late-August low touched $108.26, but these puts would need a 10% drop in IWM to get in the money. This makes the risk/reward less compelling, as you can see that the premium is priced to perfection, or overpriced, for that matter.
The three main clues I said to watch for last week were the action in the VIX, and the financial and transportation sectors.
The Financial Select Sector SPDR (XLF, $22.81, up $0.33) closed higher for the week, but a death cross officially formed, with the 50-day moving average falling below the 200-day moving average. I talked about how a move below $22 would be a bearish development. Last Thursday’s bottom reached $22.28, which represented the low for the month. The late-August low was $18.52, which is why it is imperative that XLF holds $22 this week and into October.
The transports tried to hold their 50-day moving average to start last week but failed to do so at 8,100-8,000. The rebound back above 7,800 was slightly bullish following Thursday’s test to 7,732. However, a move below 7,800-7,700 could lead to a retest of the August low of 7,452.
Another factor concerning the market is the breakdown in biotech. The sector represents a good part of the Nasdaq, and the weakness is another cause for concern for the overall market. The iShares NASDAQ Biotechnology Index ETF (IBB, $310.24, down $15.98) has formed a mini death cross, with the 50-day moving average descending below the 100-day moving average last week.
Short-term support at $310 held, but the index appears likely to test $300-$280 in the coming weeks. If the latter part fails to hold, a selloff to $250 could occur.
I will be covering some of the major announcements that could set the tone for an October rally or correction. The market will likely stay range-bound into third-quarter earnings season, which starts next week. However, there seems to be more risk to the downside than there is reward to the upside for bullish traders. Bearish traders are champing at the bit to go short, but we are still waiting for 1,100 on the Russell and 4,500 on the Nasdaq to crack before joining them.
From desk to press, futures look like this: Dow (-129); S&P 500 (-16); Nasdaq 100 (-36); Russell (-5).
Momentum Stocks Weekly Play List
All prices given in this update are current as of Sept. 25, 2015. I hereby disclose that I will be participating in the following trade(s).
The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 27-7, for a 79% win rate (144-24, or 86% win rate, overall since the start of 2011).
View the entire list of open and closed trades by clicking here.
Planet Fitness (PLNT, $18.10, up $0.38)
Entry Price: $17.85 (9/16/2015)
Lowered Price from Selling Options: N/A
Exit Target: $22.00
Return: -1%
Stop Target: $12.00
Action: Resistance is at $18.25-$18.50. A close above the latter could lead to $19-$20 and post-IPO highs. Support is at $17.50 with risk to $17 on a close below this level.
You can read my detailed write-up on PLNT in the Sept. 17 Issue.
Rave Restaurant Group (RAVE, $8.96, down $0.54)
Original Entry Price (First Position): $13.92 (7/9/2015)
Lowered Price from Selling Options: N/A
Exit Target: $20.00
Return: -36%
Stop Target: $7.00
Original Entry Price (Second Position): $11.70 (8/17/2015)
Lowered Price from Selling Options: N/A
Exit Target: $13.00+
Return: -23%
Stop Target: $7.00
Action: Short-term support at $9-$8.75 held on Friday following a test to $8.88. There is risk to $8.50-$8 on a close below $8.75. Resistance is at $9.50-$10.
Rave Restaurant Group reported earnings last week with shares falling 6% on Friday following the news.
At first glance, there seems to be a little confusion on the company’s numbers as some reports had RAVE losing 6 cents a shares while other financial reports pegged the loss at 5 cents a share. A few estimates had factored in a loss of 5 to 6 cents a share for the company, but there is very little coverage of the stock on Wall Street.
Revenues for the quarter were $3 million higher than forecasts after Rave posted quarterly revenue of $13.9 million. Expectations were for $10.9 million. I always look at revenue numbers of a company more than an earnings per share miss or beat. On the surface, the company matched or beat expectations by a penny on the top line with sales topping expectations by more than 30%.
For fiscal year 2015, Rave lost 19 cents a share with 2 cents coming from discontinued operations. This matched the 2014 loss of 17 cents from continued operations with discontinued operations accounting for another penny loss.
Some reports have the company’s loss at 18 cents for 2015 versus 17 cents last year. I went through the Rave’s 10-K report over the weekend to clarify the misconception.
Total revenues for 2015 from its two restaurant concepts, Pie Five Pizza and Pizza Inn, came in at $48.2 million versus $42.2 for fiscal year 2014. The losses totaled $1.84 million for the year compared to $1.57 million in 2014.
The company continues to expand at a rapid pace, and this can be attributed to the year-to-year losses. I have mentioned I expect Rave to be profitable next summer as its cash flow should start to cover the one-time costs of opening new restaurants.
The company owns 24 Pie Five restaurants and two Pizza Inn units. They have franchised an additional 30 units that are already opened for a total of 54 Pie Five stores now operating. There are 177 domestic franchised Pizza Inn restaurants, bringing the total number of stores under Rave’s umbrella to 233 stores.
Although the Pizza Inn franchises are showing improvement, they are still a turnaround project. For the quarter, Pizza Inn grew sales 0.2% but saw a 4.1% increase for the year.
The real story behind the company’s growth will be Pie Five as it expects 500 units over the next five years. I have said this number could approach 750 stores given the explosive multi-unit deals they continue to sign. Pie Five stores had comparable sales growth of 6.7% for the recently ended quarter and over 11% for the year.
The technical picture is still bearish on RAVE with possible risk to $8 over the near-term. I would be shocked if shares test $7 but the possibility is there if the small-caps go into correction mode.
I wouldn’t back the truck up if you don’t already own the stock, but I would start warming it up. At current levels, there is another $1-$2 of downside risk but another $8-10 of upside reward during the next six to 12 months.
Rigel Pharmaceuticals (RIGL, $2.74, down $0.23)
Original Entry Price: $3.51 (6/2/2015)
Lowered Price from Selling Options: N/A
Exit Target: $4.00-$5.00
Return: -22%
Stop Target: $2.00 (Stop Limit)
Action: I talked about risk to backup support at $2.80-$2.75 on continued weakness and if $3 failed to hold. A close below the latter could lead to $2.60-$2.50. Resistance is at $3-$3.10 and the 50- and 200-day moving averages.
You can read my detailed write-up on RIGL in the June 8 Issue.
Flex (FLEX, $10.42, up $0.07)
Original Entry Price: $12.55 (5/19/2015)
Lowered Price from Selling Options: N/A
Exit Target: $15.00+
Return: -17%
Stop Target: $9.00 (Stop Limit)
Action: Resistance is at $10.50-$10.75 and the 50-day moving average. Support is at $10.25-$10.
Earnings are due out on Oct. 22, and I will cover their numbers in a couple of weeks. You can read my detailed write-up on Flex in the July 30 Issue.
Psychemedics (PMD, $10.54, down $0.11)
Original Entry Price: $15.67 (5/5/2015)
Lowered Price from dividends: $15.37
Exit Target: $15.75 (Limit Order)
Return: -31%
Stop Target: $7.75 (Stop Limit)
Dividend Yield: 5.6%
Action: Support is at $10 with risk to $9.50-$9. Resistance is at $10.75-$11.
Earnings are due out late October/early November.
Huttig Building Products (HBP, $3.08, up $0.01)
Original Entry Price: $4.00 (8/13/2014)
Lowered Price from Selling Options: N/A
Exit Target: $6.00+
Return: -23%
Stop Target: $2.00 (Stop Limit)
Action: Resistance is at $3.15-$3.20 and the 50-,100- and 200-day moving averages. Support is at $3 followed by $2.90.
Earnings are due out in late October/early November.
Rambus (RMBS, $11.25, up $0.60)
Original Entry Price: $17.83 (11/14/2011)
Lowered Price from Selling Options: $16.38
Exit Target: $15.00+
Return: -31%
Stop Target: $9.00
Action: Resistance at $11 was cleared on Friday after the announcement that the stock will be joining the S&P 400 and S&P 600 indices. Additional hurdles are at $11.50-$11.75. Support is at $10.75-$10.50 if $11 fails to hold on a pullback.
A death cross is 2 cents away from forming between the 50- and 200-day moving averages and is suggesting weakness ahead despite Friday’s rebound.
You can read my updated analysis on Rambus in the Sept. 17 Issue.
We previously sold to open (wrote) the RMBS December 20 calls for $1.45 on Nov. 14, 2011 to reduce the cost basis to $16.38.
Trades on Hold (3): These are trades that are still open in the portfolio but are down from the original recommended price. These trades are on “hold” and are not a buy until I bring back coverage of the stock. This means I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when a trade closes. I do not recommend adding to these positions or opening new positions.
Discovery Laboratories (DSCO, March 2015) — Continue to hold.
Zynga (ZNGA, March 2014) — Continue to hold.
Galena Biopharma (GALE, February 2014) — We sold to open (wrote) the GALE October 2 calls (GALE151016C00002000) on 4/30/2015 for 15 cents — Continue to hold.
Trade on!
Rick Rouse
Editor
Momentum Stocks Weekly
