9:00am (EST)
The Dow zoomed 278 points, or 2.2%, to settle at 12,880 on Friday. The blue-chips went out at their peak and would have challenged 13,000 if there had been another hour in the trading session. We said last week to watch the 12,800-13,000 level for a possible trend change and a move above 13,200-13,250 would confirm a summer rally which is still the case. The break above the 100-day MA (moving average) was bullish but the Dow is still in a trading range up to 13,200. The low for the week came on Tuesday at 12,452 which nearly matched Monday’s dip to 12,458. This was just above the 12,350 level we had outlined for a breakdown but the Dow added over 400 points in 24 hours and cleared two layers of resistance; 12,600 and 12,800. Wow. The Dow started Monday at 12,640 and added 240 points, or 1.9%, by Friday’s close. For the year, the blue-chips are higher by 663 points, or 5.4%.
The S&P 500 surged 33 points, or 2.5%, to end at 1,362. The index also went out on its high point and easily cleared the 1,350 level. The 100-day MA of 1,359 also fell and there is now momentum up to 1,375-1,400 on the back test. The low for the week came on Monday’s break below 1,310 to 1,309 which was tested again on Tuesday’s low. The bears were pushing for 1,300 which would have opened the door for a test down to 1,275-1,250 but the index added over 50 points off the bottom. Amazing. The S&P 500 was at 1,335 before Monday’s open and was up 27 points, or 1.8%, for the week. For 2012, the index is showing a gain of 105 points, or 8.3%.
The Nasdaq advanced nearly 86 points, or a solid 3%, to close at 2,935. Tech would have hit 2,950 if there would have been more time which clears the way for a run to 3,000-3,100. We have been mentioning as long as 2,850 holds there was a chance the bulls would crack 2,900 and make a possible push towards 3,000. The bears were thisclose to breaking major support at 2,800 following Monday and Tuesday’s lows of 2,829 and 2,832, respectively. The bears will be looking for a close below 2,900 this week. The index started Monday at 2,892 and was up 43points, or 1.5% by Friday’s closing bell. For 2012, the Nasdaq is showing a gain of 330 points, or 12.7%.
The Russell 2000 rocketed higher by 22 points, or 3.1%, to close at 798. The small-caps traded down to 759 and 758 on Monday and Tuesday but the bulls were able to hold the 750 level although a break below the 200-day MA was triggered. The Russell 2000 has not closed above the 800 level since early May but is within spitting distance. If cleared, we could see 810-820 on fluff. The Russell 2000 was at 775 before Monday’s open and advanced 23 points, or 3%, by Friday’s close. The index is up 48
points for 2012, or 7.8%.
The S&P Volatility Index ($VIX, 17.08, down 2.63) fell over 13% and closed below the 17.50 level which was bullish. The VIX continues to make double-digit percentage moves and we said there could be a push to 17.50 on further market momentum. While there is a chance for a test to 15, the bulls failed to break the prior week’s low 16.77. The bears will be pushing to move the VIX back above 20-22.50 this week.
The chart work we did mid-week showed the major indexes had formed a bear flag and that there would be a slight back test to resistance which occurred on Wednesday. The upper downtrend lines we showed you last week and the 100-day moving averages were holding up well so we had a feeling there could be another leg lower.
When we went to press on Thursday afternoon at 2pm, the market was off over 1% with the Dow down 147 points to 12,479 while the S&P was lower by 16 points to 1,315. The Nasdaq was getting pounded for 52 points and was at 2,823. We also had a feeling Nike and Research In Motion were going to disappoint Wall Street and that the EU Summit was going to be another dog-and-pony show.
Well, we were right on the earnings misses but we knew when the market rallied back that afternoon to close near even something didn’t feel right. Futures tanked in after-hours on the Nike and RIMM news and it appeared the market would hit new lows on Friday. However, late Thursday evening, the European Leaders came up with another plan to make a plan to solve the current sovereign debt crisis and the futures markets made a dramatic reversal.
We knew Friday morning would be a massive day for short-covering but we often remind our readers one day doesn’t make a trend. The euphoria lasted all day but nothing was accomplished by the European Union (EU) and questions remain. To dummy things down, the EU bailout funds will now go directly to the banks instead of passing through the government. By eliminating the “middle zombies”, the EU will directly fund the problem banks through the EFSF and ESM. Brilliant, huh?
There is also talk the EU will form some type of joint banking system, similar to the FDIC here in the States but printing money for insolvent countries can’t go on forever. The new plan to come up with a plan is the same sentence we have typed over the last dozen of these meetings and there is usually some type of follow through rally.
We often say markets can become overbought or oversold and that support and resistance can get stretched. While there is room for some fluff, some of the major averages and sectors cleared their 100-day MA’s while other didn’t. We also mentioned how the 200-day MA’s were coming into play last week and that volatility would be picking up. The violent moves we are seeing are telling us something and this week
be a tricky week to trade.
We often mention how the Wall Street pros like to take their long vacations which can lead to wild and erratic markets. This week is a little intriguing because some traders will likely take Monday and Tuesday off to give them a 5-day weekend while others will take Thursday and Friday to do the same.
Many of them are feeling bullish due to the breakout but there are a number of economic reports due out this week that could rock or pop the market. Volume will be extremely light which can also cause dramatic price swings and 2Q earnings start next week. With the results Nike and RIMM reported, they should have warned investors but we will give RIMM a pass since we have told you their writing is already on the wall.
This week will be the absolute last week to confess and there have already been at least 75 companies that warned Wall Street they were to miss estimates. That is a lot folks, and many of them are planning Europe. The earnings bar is low enough so there could be a continued rally if the bulls can get through this week but the bears will be throwing in the kitchen sink to hold resistance.
We saw how strong the bulls held support but the 2-month trading range the market has been in could be ready to explode or, it could continue. Our chips are still betting on a move back towards support by mid-July with a possible 10%-15% correction by August but the bulls have been known to climb a wall of worry.
One stock to watch this week is Alcoa (AA, $8.75, up $0.24) which can often give clues on which direction the market is headed. If Alcoa rallies this week past $9, the market will likely test its highs for the year. If shares struggle at $9 and Alcoa disappoints Wall Street, expect a retest back to support and possibly new lows for the year.
Aswe head to press, futures are showing a mixed and look like this. Dow futures are down 6 points to 12,802 while the S&P 500 futures are up by 2 points to 1,358. The Nasdaq 100 futures are showing a 1 point decline and are at 2,609.
Do not risk more than 5% of your trading account on any one trade but do try to take ALL of the trades. Please remember, ALL “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless we list one. We will send out a “Profit Alert” or “Trade Update” if we want you to close a position OR if a new trade comes out. Otherwise, follow instructions atall times in the 9am and 1pm updates. Also, we will usually give you a heads-up if we think we are going to send an email outside of these time frames
PowerShares QQQ (QQQ, $64.16, up $1.96)
August 59 puts (QQQ120818P00059000, $0.45, down $0.55)
Entry Price: $0.75 (6/27/12)
Exit Target: $1.50
Return: -40%
Stop Target: None
Action: We would like to see $65 hold but there is risk to $67. The August options have nearly 7 weeks before the expire and we are expecting a drop below $60 by then so be patient.
AOL (AOL, $28.08, up $0.58)
August 24 puts (AOL120818P00024000, $0.45, down $0.10)
Entry Price: $0.53 (6/26/12)
Exit Target: $1.00
Return: -15%
Stop Target: None
Action: We expect resistance to hold at $28 but there is risk up to $30. We are still looking for a test to $26 over the near-term and then $24.
Consumer Discret Select Spider (XLY, $43.78, up $0.91)
August 41 puts (XLY120818P00041000, $0.45, down $0.25)
Entry Price: $0.80 (6/25/12)
Exit Target: $1.60
Return: -44%
Stop Target: None
Action: There is risk to $45 but we are expecting a test to $40 over the next week or two; mid-$30’s by August.
Coinstar (CSTR, $68.66, up $2.26)
July 60 puts (CSTR120721P00060000, $0.30, down $0.50)
Entry Price: $0.90 (6/25/12)
Exit Target: $1.80
Return: -67%
Stop Target: 40 cents
Action: There is risk to $70 but the company has already warned of an earnings miss. The July options have nearly 3 weeks before they expire and we would like to see a move back below $65 this week.
iShares Dow Jones US Real Estate (IYR, $63.94, up $1.42)
August 57 puts (IYR120818P00057000, $0.30, down $0.25)
Entry Price: $0.85 (6/25/12)
Exit Target: $1.70
Return: -65%
Stop Target: 40 cents
Action: We said there could be a test to $64 which was hit on Friday. There is further risk to $65 but we are expecting a fade below $60 by mid-August.
KLA-Tencor (KLAC, $49.25, up $1.75)
August 43 puts (KLAC120818P00043000, $0.55, down $0.40)
Entry Price: $0.90 (6/25/12)
Exit Target: $1.80
Return: -39%
Stop Target: 45 cents
Action: We said there could be risk to $50 which held on Friday. Beyond that $52 is a possibility but we are expecting a close below $45 by week’s end.
Illinois Tool Works (ITW, $52.89, up $1.95)
July 50 puts (ITW120721P00050000, $0.35, down $0.50)
Entry Price: $1.05 (6/4/12)
Exit Target: $2.10
Return: -67%
Stop Target: None
Action: Shares came close to falling below $50 last week and we are still expecting a test to $48 by mid-summer.
Other 2012 Portfolio OPEN positions (9): These are trades that are still open in the portfolio but are down over 50%. They have longer expiration dates and are on “hold” but are not worth mentioning until they turn around. This means we would not open any new positions. We are still keeping track of the trades and we will record the results, accordingly, when we close them or if the options
expire. Click on the 2012 Portfolio link in the Members Area to view ALL open/ closed trades.
E*Trade Financial July 12 calls (from March 2012)
Bank of America January 12.50 calls 2013, July 12 calls (from March 2012)
Apollo Group August 27 puts (from May 2012)
Best Buy July 16 puts (from May 2012)
First Solar July 10 puts (from May 2012)
FedEx July 77.50 puts (from June 2012)
Potash July 35 puts (from June 2012)
iShares Russell 2000 July 70 puts (from June 2012)
Facebook July 24 puts (from June 2012)
WATCH LIST SECTION
These trades are NOT
recommendations. They are trades that we like but have not added to the portfolio as an official recommendation because of market conditions or because we are waiting for better entry prices. We try not to have more than 12-15 open trades at any one time which is why we created a Watch List. We will not list entry prices because these stocks are on the verge of breaking out or they could sell off but these are the trades we are watching as new candidates.
Health Care Select Sector Spider (XLV, $38.01, up $0.71)
August 38 calls (XLV120818C00038000, $0.80, up $0.30)
August 36 puts (XLV120818P00036000, $0.25, down $0.20)
Thoughts: A move above $38 would be bullish while a break below $36 could spell trouble.
McKesson (MCK, $93.75, up $0.48)
July 95 calls (MCK120721C00095000, $0.70, up $0.10)
Thoughts: This is a possible choice for a healthcare play as shares are near a decade high. The chart is showing a possible breakout to blue-sky territory and could reach triple-digits.
Freeport-McMoRan Copper & Gold (FCX, $34.07, up $1.81)
August 31 puts (FCX120818P00031000, $0.80, down $0.60)
July 35 calls (FCX120721C00035000, $0.60, up $0.35)
Thoughts: We like this trade and would like to see a test to $35 which is where we might give Freeport another ride.
Netflix (NFLX, $68.49, up $1.12)
August 50 puts (NFLX120818P00050000, $0.90, down $0.15)
July 60 puts (NFLX120721P00060000, $0.55, down $0.25)
Thoughts: If shares fall below $65 a quick test to $50 could be in the cards. We like the puts we have listed but the premiums are a little juiced which could keep us on the sidelines.
iShares Dow Jones Transportation Average
(IYT, $93.33, up $2.55)
August 85 puts
(IYT120818P00085000, $0.80, down $0.80)
Thoughts: Resistance has held up well at $95 and a drop below $90 would be bearish.
Schlumberger (SLB, $64.91, up $2.19)
August 57.50 puts (SLB120818P00057500, $0.85, down $0.55)
Thoughts: We may be getting an opportunity for a quick trade so stay ready.
