The bulls avoided their first three-week losing streak in over a year after the market rallied throughout the week. Friday was a volatile session and that is usually the case with option expiration day, but geopolitical concerns also added to the mayhem.
The bears ended the week by taking three of the four major indexes, but tech looked strong after making a run at its 52-week peak. This week could be extremely volatile with the Fed heads meeting up for their annual gathering in Jackson Hole, along with heightened saber rattling.
The Dow fell 50 points, or 0.3%, to finish at 16,662 on Friday. The blue-chips reached 16,775 on the open before a 200-point drop to 16,575 during the first half of trading. Shaky support at 16,600 held, and the index nearly cleared 16,800. I mentioned that a run into the 16,800-17,000 zone could come following the back test and hold of the 200-day moving average the prior week. The Dow just missed holding its 100-day moving average, and there is further risk to 16,400-16,350 on a close below 16,600.
The S&P 500 slipped 0.01%, to settle at 1,955. The index finished just below its 50-day moving average but did reach a high of 1,964 on Friday. I mentioned that the S&P might struggle at 1,950-1,960, but the midweek close above 1,940 was the breakout sign. Tuesday’s low reached 1,928, but support at 1,925 and the 100-day moving average held like a champ. If the bulls can clear and hold 1,960 to start the week, look for another run to 1,975-2,000.
The Nasdaq gained a 12-pack, or 0.3%, to close at 4,464. Tech traded to a high of 4,482 ahead of Wall Street’s lunch break and bottomed at 4,427 before rebounding late in the day. The bulls were able to hold 4,450 to keep 52-week highs in play, and a move above 4,486 would do the trick. A close below this level, and more importantly, 4,425-4,400 and the 50-day moving average, would be bearish.
The Russell 2000 slipped a little over a point, or 0.2%, to end at 1,141. The small-caps closed just below their 200-day and 100-day moving averages at 1,145 but held 1,140 into the close. I talked about the bulls needing to clear 1,150 and the 50-day moving average at 1,160 before they were out of the woods, and Friday’s action was discouraging to an extent. The low of 1,131 was higher than Tuesday’s trip to 1,129, but another close below 1,125-1,120 could spark another round of selling pressure.
The S&P 500 Volatility Index ($VIX, 13.15, up 0.83) traded down to 11.89 on Friday’s open but zoomed to 14.94 on the Russia-Ukraine headlines. The bulls held 15 and kept the close below 13.50, both bullish signs. Any closes above 15 this week would be bearish, while any drops below 12.50 would continue to be bullish. More on the VIX to come…
There were three clues I said to watch for last week, and they were the VIX, the Monday/Friday Dow closes and the action in the small-caps. The bulls came close to getting the hat trick but fell just short with Friday’s pullback in the blue-chips.
The Dow started the week with a Monday win, but it wasn’t too impressive. Still, the 16-point gain extended the blue-chips winning streak to three straight Monday’s. Friday’s have been weak of late, with the bears now winning three of the past four sessions. Of course, much of the end-of-week weakness was tied to the Russia-Ukraine crisis.
The blue-chips haven’t closed in the red on both a Monday/Friday since April, so this trend continues to be an important tell for market direction. For new subscribers, up Dow M/F’s are bullish and usually means money is flowing into the market, while negative sessions are bearish. Mixed Monday/Friday sessions can suggest trading ranges.
The VIX was another important clue that I used to remain bullish and it too continues to be a great tool for predicting market direction. The VIX came into the week above 15, and I mentioned that the bulls needed to get back below this level and then 13.50. Monday’s close at 14.23 and test to 13.72 was a good sign that a continued bounce off the lows would come. Wednesday’s drop below 13.50 confirmed higher highs were in store for the S&P, and this level will need to hold throughout this week. The bulls cannot afford to give up the 15 level again. The VIX traded to a low of 12.42 on Thursday and will need to get a close below 12.50 to confirm higher highs this week.
The action in the small-caps was encouraging, but the Russell 2000 is still down nearly 2% for 2014. The other major indexes are all positive for the year, with the Nasdaq and S&P 500 advancing 6.9% and 5.8%, respectively. However, the Dow is only up 0.5% YTD and has underperformed its peers. The bears only need 86 points to take back the blue-chips.
It is unclear if technical analysis trumps headline news this week, and the bears are all about the drama. Economic news here at home (pun intended) and from across the pond will also play a major role in determining market direction this week. The housing sector will once again be in focus and, despite its fits and starts, the industry is holding up. Once rates start to rise, and that depends on the Fed Heads, there could be a rush to lock-in historical low rates and then we could see the real demand for housing return.
If the economic news worsens in Europe, the European Central Bank (ECB ) will come under more pressure to do something to get economic growth going. However, compounding the problem are the Russian sanctions that will act as a double-edged sword going forward.
This week, the VIX, the M/F closes and the small-caps will once again be my points of interest. However, my main focus will be on the Nasdaq. Thursday’s close above 4,450 was money, and the suit-and-ties failed to notice Friday’s push toward not only 52-week highs, but 14-year peaks as well.
The upper-end of my early March, near-term fluff target for the Nasdaq has been 4,500, with 4,800-5,000 possible by year-end. Tech reached its 52-week high of 4,485.93 on July 3. A week later, the index tested a low of 4,351 on July 10. Two weeks afterwards, on July 24, the Nasdaq made a run to 4,485.50. Two weeks after that, on Aug. 7, the Nasdaq was at 4,321 and had broken below its prior July low.
Fast-forward to now, two weeks later, and the Nasdaq is knock, knock, knocking on heaven’s door. My point is that volatility has been extreme, with 3%-4% price swings from weeks to weeks, but support held, and a break out of this mini-trading range could be powerful.
I will be watching the 4,485 level on the Nasdaq for clues of a possible short-covering rally this week and a run past 4,500. A rising tide tends to lift all boats and, if tech breaks to new highs, the other indexes should follow suit.
The conflict between Russia and Ukraine will once again be the good or bad wild card that could help or hinder the market, but other geopolitical headlines from Israel, Liberia and Nigeria are also in play.
Bond yields continue to tank and have Wall Street worried, but I predicted earlier this summer the 10-Year note could fall to 2%. I don’t actively trade the bond market, but it has also been one of my bullish theses for a higher stock market all year, as the low yields will continue to drive investors towards the stock market.
At some point, the bears will show up, perhaps this week, but all signs are still pointing towards a continued rebound with a possible breakout on the horizon.
Ahead of the open, futures look like this: Dow (+87); S&P 500 (+10); Nasdaq 100 (+21).
MEMBERS AREA
Closed Trades for 2014: 81-39 — the Weekly Wrap is 22-4 (85%) for 2014 (107-11, or 91% win rate, since 2011) and is designed for traders that want to use options with less risk. All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.
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 I list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position or if a new trade comes out. Otherwise, follow instructions at all times in the 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.
Sony (SNE, $18.41, up $0.34)
September 18 calls (SNE140920C00018000, $0.75, up $0.20)
Entry Price: $0.50 (8/14/2014)
Exit Target: $1.00
Return: 50%
Stop Target: None
Action: Near-term resistance is at $18.50 with support at $17.75. Shares could make a run at $20 as long as the 200-day moving average holds at $17.38.
Sony is a household name and is doing wonders with it PS4 business. The company will be introducing it “curved” television in the coming months and has its fingers in a number of other pies.
I have talked about how Apple and Sony would be a “good fit” if Apple wanted to get into TV’s. The synergies between the two companies would be dynamic, but this trade is based on momentum and not the longer-term outlook for Sony. However, if shares clear $18.75, I may add another call option trade to play the momentum.
Fossil (FOSL, $97.02, down $0.38)
September 90 puts (FOSL140920P00090000, $0.65, flat)
Entry Price: $1.05 (8/12/2014)
Exit Target: $1.75-$2.10 (Limit Orders)
Return: -29%
Stop Target: None
Action: Resistance is at $97-$98. I will stick with the trade as long as $100 holds. A break below $95 would be extremely bearish in an already broken stock.
Yahoo (YHOO, $36.47, up $0.11)
September 38 calls (YHOO140920C00038000, $1.30, flat)
Entry Price: $1.25 (8/11/2014)
Exit Target: $1.90-$2.50
Return: 4%
Stop Target: None
October 43 calls (YHOO1018C00043000, $0.75, flat)
Entry Price: $0.80 (8/11/2014)
Exit Target: $1.90-$2.50
Return: -6%
Stop Target: None
Action: Yahoo cleared its 200-day moving average on Friday, and a close above $37 would be bullish. Shares have been hovering in a tight range for three weeks between $35.50-$36.50. I’m expecting a breakout to $40+ once $37 clears. The 200-day moving average is at $36.43.
World Wrestling Federation (WWE, $13.86, down $0.04)
September 15 calls (WWE140920C00015000, $0.35, flat)
Entry Price: $0.50 (8/6/2014)
Exit Target: $1.00+
Return: -30%
Stop Target: None
Action: Resistance is at $13.75-$14 and a close above the latter would be bullish. Support is at $13.50, and a drop below this level will likely lead to $13. As you can see, a mini-trading range has formed on the chart, which is not good for options unless the breakout or breakdown comes before expiration.
The two prior WWE trades made 203% (in early March) and 133% (in early August). This is a piggy-back trade that I’d like to see perform just as well.
Pool (POOL, $55.60, down $0.29)
October 50 puts (POOL141018P00050000, $0.65, flat)
Entry Price: $1.10 (7/16/2014)
Exit Target: $2.20-$3.30
Return: -41%
Stop Target: None
Action: A break below the July low of $54.16 would be bearish and could lead to $50 and fresh 52-week lows. Longer-term resistance is at $57 along with the 200-day moving average.
The break-even point for the trade is at $48.90, technically, by mid-October. These options have over two months before they expire.
Other 2014 Portfolio Open positions (3): 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 I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly, when the trade closes or if the options expire. Click on the 2014 Portfolio link in the Members Area to view all open/closed trades.
Fortinet September 28 calls (from June 2013) – continue to hold
CVS Caremark September 82.50 calls (from July 2014) – continue to hold
S&P 500 Spiders September 180 puts (from August 2014) – continue to hold
