9:00am (EST)
We said the bears might be waking up and they are dropping clues they might be ready to rumble.
The first blow came on Wall Street’s lunch break at the bears cracked the first wave of support and the second came when they got they second-straight win on the S&P 500 – a feat not accomplished since the beginning of February.
These developments, along with a negative Monday close, could lead to a test to the next waves of support for the major indexes.
The bulls did show some signs of life after making a push higher at the open and by keeping the losses to a minimum. They also held the VIX below 15 so no real damage was done by the bears. However, we have said the bears strike hard and fast and we will be happy to ride their backs by playing put options but we aren’t ready to give up on the bulls until we see a few more signs of weakness.
The Dow fell 67 points, or 0.4%, to end at 16,351. The blue-chips made a run to 16,460 but never really challenged resistance at 16,500. The index held near-term support at 16,350 but did trigger 16,325 that was a lower low than Monday and in the last 5 trading sessions. There is risk to 16,200-16,00 on a 1-2 punch.
The S&P 500 dipped 9.5 points, or 0.5%, to finish at 1,867. The index touched 1,882 on the open and came with a point of triggering fresh all-time highs but faded below support at 1,875 by the close. We figured a stretch to 1,870 might come and we said there would be further weakness to 1,850 if the bears got below this level. We have a possible put trade on deck to take advantage of further weakness.
The Nasdaq declined 27 points, or 0.6%, to close at 4,307. Tech tried to the 4,350 level after kissing 4,354 but the bulls were unable to do so. They did hold shaky support at 4,300 but the lower low at 4,295 opened the door for a possible test to 4,275-4,250.
The Russell 2000 gave back a baker’s dozen, or 1.1%, to settle at 1,187. We mentioned in our midday update to watch for a close below 1,200 as it could lead to 1,175. Tuesday’s low reached 1,183 following a 4-point pop to 1,204 shortly after the open. Side note: Our IWM possible put option trade has moved up on the Watch List.
The S&P Volatility Index ($VIX, 14.80, up 0.13) traded to a high of 14.93 after testing 13.84 on the open. At this point, it is still anybody’s game as a close below 13.50 favors the bulls. Another pop past 15 could be the real deal but remember, no flinching until 17.50 triggers.
We are watching the Financials like a hawk as we have mentioned they needed to show some leadership on the next leg higher. While we have our favorites, to get a quick snapshot of the sector to see if there is strength or weakness, we suggest following the Financial Select Spiders (XLF, $22.23, down $0.15). The index has been pushing 52-week peaks and if the bears can get the action back below double-deuces ($22) it might also suggest a short-term top is in.
As we head from desk to press, here is how futures look: Dow (-38); S&P 500 (-5); Nasdaq 100 (-11).
Closed Trades for 2014: 27-8 – the Weekly Wrap is 11-2 for 2014 (96-9, or 91% win rate, since 2011) and is designed for traders that want to use options with less risk.
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 tradesor “Exit Orders” in your brokerage account unless we list one. We will send out a “Profit Alert” or “New Trade” if we want you to close a position OR if a new trade comes out. Otherwise, follow instructions at all 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.
Verizon (VZ, $46.70, down $0.33)
April 45 puts (VZ140419P00045000, $0.60, up $0.10)
Entry Price: $0.62 (3/10/2014)
Exit Target: $1.30
Return: -3%
Stop Target: None
Action: We believe shares could test $40 over the longer-term and fall below $45 over the near-term. Resistance is at $48.
Opko Health (OPK, $9.14, down $0.10)
April 10 calls (OPK140419C00010000, $0.40, down $0.05)
Entry Price: $0.65 (3/4/2014)
Exit Target: $1.30
Return: -38%
Stop Target: None
Action: Resistance remains at $9.50-$10 and a close above the latter would be super bullish for a run to $12-$13 on short covering. Support is at $9-$8.75.
Discovery Laboratories (DSCO, $2.66, up $0.07)
April 2 calls (DSCO140419C00002000, $0.80, up $0.05)
Entry Price: $0.65 (2/24/2014)
Exit Target: $1.00-$1.30
Return: 23%
Stop Target: 65 cents (Hard Stop)
Action: A close above $2.70 would be bullish and yesterday’s high was $2.72. Support is at $2.50 and a dip below this level will likely force us out of the trade. Yesterday’s low was 67 cents on the options.
World Wrestling Federation (WWE, $29.92, down $0.17)
March 30 calls (WWE140322C00030000, $1.70, down $0.30)
Entry Price: $0.40 (2/18/2014)
Exit Target: Limit Order at $3, lower to $2, to exit remaining quarter (3/5/14 closed half @ $0.80, 3/6/14 closed a quarter at $1.80)
Return: 219%
Stop Target: $1.45 (Hard Stop on remaining quarter)
Action: We have set limit orders to try and close the last quarter of the trade at $2 today.
Like a classic wrestling match, the last quarter position of this trade is still hanging in there. The options traded to a low of $1.60 yesterday but with time decay rapidly approaching, we will likely get stopped out if shares can’t clear and hold $30 at the open.
Kodiak Oil & Gas (KOG, $11.18, down $0.63)
June 13 calls (KOG140621C00013000, $0.40, down $0.20)
Entry Price: $0.70 (2/13/2014)
Exit Target: $1.40
Return: -43%
Stop Target: 30 cents
Action: We believe the company is a takeover candidate that could get a bid north of $15. Support is at $11. Resistance is at $11.75. If the stock fails to hold $11 and the options fall below 30 cents, we will have to decide if we want to leave the trade open. We do not have a Hard Stop listed because we like the takeover aspect of the company being acquired. Given the time the trade has, we will likely keep it open as we have a good history of picking takeover targets.
We have said over the years Bud, Marvel Entertainment, and most recently Knight Capital would be acquired. Knight was an especially bold call given the trading debacle they went through. We could be totally wrong about Kodiak but that is the water-cooler talk.
Exact Sciences (EXAS, $13.64, down $0.15)
April 19 calls (EXAS140419C00019000, $0.50, flat)
Entry Price: $0.88 (1/22/2014)
Exit Target: $1.75
Return: -43%
Stop Target: None
Action: Support is at $13. Resistance is at $14.50 and a move above this level should get us back near even.
The company should get some FDA news in March on its Cologuard drug. These are April options with 2 months until expiration and we plan to hold through the volatility because we want to be in when the March news is released. We do not have a Stop Limit listed.
Other 2014 Portfolio OPEN positions (6): 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 mkh jb√ accordingly, when we close them or if the options expire. Click on the 2013Portfolio link in the Members Area to view ALL open/ closed trades.
Sony April 20 calls (from January 2014) – continue to HOLD
General Electric March 28 calls (from January 2014) – continue to HOLD
Ariad Pharmaceuticals March 10 calls (from January 3014)
May 11 calls (from January 3014)
Caterpillar March 85 puts (from January 2014) – continue to HOLD
McDonald’s March 90 puts (from February 2014) – continue to HOLD
Apollo Education Group March 29 puts (from February 2014) – continue to HOLD
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 and why we have 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.
iShares Russell 2000 (IWM, $118.06, down $1.24)
April 112 puts (IWM140419P00112000, $1.10, up $0.25)
Thoughts: We could go short on a drop below $117.50
S&P 500 Spiders (SPY, $187.23, down $0.93)
March 185 puts (SPY140322P00185000, $1.20, up $0.30)
Thoughts: We could use these puts for a short-term trade on weakness.
Philip Morris (PM, $79.52, down $0.91)
April 77.50 puts (PM140419C00077500, $1.25, up $0.30)
Thoughts: A back test to $75 could be coming.
Finish Line (FINL, $27.48, down $0.18)
April 30 calls (FINL140419C00030000, $0.55, down $0.05)
May 30 calls (FINL140517C00030000, $0.70, down $0.05)
Thoughts: The sneaker shoe business is exploding. We could boggle you on so many stats but let’s stick to the options for now. But it is an interesting subject.
We mentioned the weather kept us out of the Foot Locker trade last week and Nike can be a crowded trade. What’s interesting with Finish Line is that the company also operates 660 Macy’s stores.
Morgan Stanley (MS, $31.70, down $0.43)
April 33 calls (MS140419C00033000, $0.55, down $0.15)
Thoughts: We like these calls on a break above $32.50.
Valero Energy (VLO, $53.67, up $0.20)
April 57.50 calls (VLO140419C00057500, $0.90, up $0.05)
Thoughts: There could be a run past double-nickels ($55) coming.
