9:00 a.m. (EST)
The month of September is always a tricky month to trade despite the historical patterns for fall pullbacks. They can’t always be counted on, however, as Septembers over the past few years have been bullish, but history may be returning to normal.
The summer rally from August is starting to feel like a distant memory despite the run to fresh highs at the beginning of the month. Much of last week was spent testing support, with volatility elevating to higher levels, but the indexes were mixed heading into Friday’s action.
The bulls held both bear battles and used another final hour rally to cut Friday’s losses in half. However, the early morning damage was enough to give the bears the weekly win.
The Dow dropped 61 points, or 0.4%, to finish at 16,987 on Friday. The blue-chips traded in negative territory throughout the session following a first-half run to get back to even. The bears took control of the 17,000 level shortly after lunch and pushed a low of 16,937 an hour ahead of the close. It was a fresh low for the week and month and a level that hasn’t been tested since mid-August. Even worse, the close below 17,000 snapped a 15-session streak above this level. I have talked about risk to 16,800 (the 100-day moving average) on a close below this level, with backup support at 16,600. If the bears get a close below 16,900 and the 50-day moving average to start the week, there is wiggle room to 16,750-16,600. A close above 17,100 would be bullish and could lead to a run to 17,350-17,500. The Dow fell 150 points for the week.
Dow 10-year chart from Feb. 21, 2014:
Dow 10-year chart updated: There is a good chance that the Dow finishes the year above 18,000 as long as the major moving averages hold. I have talked about the blue-chips reaching 19,000 if Apple (AAPL, $101.66, up $0.23) shares were added to the Dow 30, but that may or may not happen this year. The NYSE needs a splashy “new” addition, and Apple fits that headline. A close below 16,600 could lead to 16,000-15,800 and would represent a decline of 6%-7% from current levels.
The S&P 500 slipped nearly 12 points, or 0.6%, to finish at 1,985. The index was in a steady decline from the open on Friday, and I warned that the bulls needed to hold 1,985 or there would be risk to 1,975. Friday’s low reached 1,980 — a level not seen since late-August. The struggle to clear and hold 2,000 was evident throughout the week but is still less than 1% away. The close at 1,985 was semi-bullish, but there is risk to 1,950 on continued lows and if 1,975 fails to hold up. The S&P declined a double-deuce, or 22 points, last week.
S&P 500 10-year chart from Feb. 21, 2014:
S&P 10-year chart updated: The S&P reached an all-time peak of 2,011, and my year-end target of 2,100 is 6% away. I still expect this level to trigger as long as the 50-day and 100-day moving averages hold on any pullback. A close below 1,950 could lead to 1,900-1,875 and would represent a decline of 4%-6% from current levels.
The Nasdaq tanked 24 points, or 0.5%, to end at 4,567. Tech also bobbed for apples ahead of the weekend, as the bears pushed a low of 4,555. I have warned of a test to 4,575-4,550 on continued failed attempts by the bulls to hold 4,600. The bullish news is that it wasn’t a lower low for the week or month (4,544 and 4,542), as the index split my downside zone. There is backup support at 4,450-4,400. A close above 4,600 keeps 4,700 in play over the near term. The Nasdaq gave back 15 points for the week.
Nasdaq chart from Feb. 21, 2014:
Nasdaq 10-year chart updated: Tech is still on track at making a run at 4,800-5,000 and its all-time high as long as 4,400-4,350 holds on any back tests. This would represent another 5%-9% from current levels. A close below 4,400 could lead to 4,250-4,000 and would represent a decline of 7%-12% from current levels.
The Russell 2000 declined 11 points, or 1%, to close at 1,160. The small-caps struggled with resistance at 1,175-1,180 for much of the week, which represents slightly more than a 2% gain from current levels. I have been warning repeatedly that the bulls needed to hold 1,160-1,150 and, after trading into positive territory by a half-point on Friday, the bears pushed 1,157. The low of 1,155 from midweek held, and there is additional wiggle room to 1,140. The Russell 2000 tanked less than 10 points last week, or less than 1%, so the damage wasn’t as bad as it appeared. However, the chart is getting bearish.
My Russell 10-year chart from Feb. 21, 2014:
Russell 10-year chart updated: The small-caps peaked at 1,213.55 on July 1 and didn’t “technically” trip 1,200 until early March. The lull and trading ranges since my 1,400 prediction from late-February have really hurt the chances of this level triggering by year-end, but the small-caps usually lead winter strength in the market. There is a very good chance that 1,100 is tested if 1,140 fails to hold, and that would represent a 5% decline from current levels. A move of 5% higher from current levels puts new highs in play and would have the small-caps at 1,220-1,225.
Side Note on the small-caps: One of the best clues I got last December, or nine months ago, was this little nugget that no one on Wall Street picked up. If they did, they would have known that the small-caps were going to trigger 1,200 in 2014. My chart work from January shows the “imbalance” on the Russell 2000 that I talked about ahead of Christmas:
My thoughts midday on Dec. 23, 2013:
“The Russell 2000 opened at 1,212.81 and kissed 1,213.49 in the opening minutes before coming back down to earth. The 5% move could have been a rebalancing act and either marks the high for the year or is one hell of a clue this level will be triggered in January.”
On the morning of Dec. 24, 2013 here is what I reported:
“We mentioned the spike in the Russell 2000 was puzzling and from our research it was the result of a “temporary technical issue” in the index’s data feed for real-time index calculations. The issue was supposedly “fully resolved” and the high of 1213.49 was to be corrected after Monday’s closing bell according to the higher ups familiar with the situation.”
As you can see, the “bar” has been erased, and here is what the chart should look like (green candle stick is my “research”):
The S&P 500 Volatility Index ($VIX, 13.31, up 0.51) traded to a high of 14.27 on Friday, which was its peak for the week and month. I warned that there was wiggle room up to 15 and the mid-August highs, but that a close above this level would be bearish. I also mentioned that the bulls needed to hold 12.50 coming into the past week, and they failed at that task on the first day back last week. The near-term chart is pointing towards a major breakout or breakdown in the coming weeks as a symmetrical triangle plays out.
VIX 10-year chart updated: The longer-term chart shows volatility up to 17.50, and a move above this level would bring 20-22 back into the fold. I have said that if the bulls can get the VIX back below 11.50, new highs would be in play along with single-digits.
There were several bear warnings signs throughout the week that ended with a major one developing on Friday. The bulls had their five-session Monday win streak snapped at the start of last week, and the lower Friday on the Dow was a serious bearish signal.
It was the first lower Monday/Friday close in the same week for the blue-chips since April. For new subscribers, I like to see higher Monday and Friday closes on the Dow, as it signals that money is still moving into the market. Negative M/F closes can signal weakness and money moving to the sidelines. Mixed Monday/Friday closes can signal trading ranges.
It will be important for the bulls to get off to a good start this week and get a Monday win. If not, they will go into Friday’s September option expiration day on a three-session M/F losing streak.
This Friday could bring added volatility or freaky-ness, as it will also be a triple-witching day. This is when all stock index and futures expire along with stock options. This event occurs four times a year and has been dubbed by some Wall Street vets as “Freaky Friday.”
Beside the lower M/F closes and lower support levels being pushed, there were some bullish signs, as the small-caps and Tech held support. If the Nasdaq and Russell 2000 lead Monday’s bear parade lower, prepare for the second waves of support levels to be tested.
I covered the VIX in more detail earlier, but watch the index to see how much “fear” appears on Monday’s open.
The one major worry that I said in February that could have a major impact on my 2014 Price Targets for the market was “war.” There have been plenty of geopolitical concerns over the past six months and, while it feels as though things have gotten to a tipping point, let’s hope not.
The current geopolitical scene remains heightened after the President promised to hunt down ISIS. The increased airstrikes by the United States was something that had to be done, and the increasing sanctions against Russia were a continued given. Another killing by ISIS this past weekend of a British citizen was sad and will certainly ignite more war talk or air strike rhetoric. While it could be bad for the market, it will be good to meet this continued ISIS crisis head-on (with allies).
Besides the geopolitical events, the government zombies are scrambling to keep corporate America at higher tax rates than the rest of the world. They seem threatened that their salaries or cushy lifestyles that we can continue to pay for are in jeopardy. Their salaries, expensive SUVs, free haircuts and health care, not to mention their lifelong pensions are in jeopardy as more and more American companies grow tired of paying one of the highest corporate tax rates in the world.
This is why I warned of Jack Lew’s comments to start the week, as the Secretary of the Treasury promised to crack down on corporate America’s latest tactics. Before I get carried away, a new competitive law should be passed ASAP that lowers America’s corporate tax rate to 15%-20%. Then see how many companies from overseas come knocking on our doors to incorporate here at home and to create jobs — but that’s too easy — especially if you only work one hundred and some days a year.
This week’s Fed-speak policy statement will be scrutinized heavily as their two-day meeting starts on Tuesday. There could be a knee-jerk reaction to its statement on Wednesday, as the Fed attempts to reword the current wording on quantitative easing. They could use some new Webster’s words to sound hawkish or dovish, but their overall goal will be to keep the market from collapsing. In other words, the spin-cycle will be in full gear.
Some Wall Street pros will argue that the market will go up because of what language is added, removed or changed from their current Fed comments, while some will say a crash is coming. I will be watching the technical indicators instead of listening to the talk.
For the hard-core bears that have been calling for a market pullback for two years, at some point they will be right and, if they are, they will get their 15 minutes of fame. Nobody will question how many prior television appearances they have made calling for a 10% pullback, just as long as they get it right when a selloff finally does come. Even a broken clock is right twice a day.
The other big event for the week will be the referendum on whether Scotland should be an independent country, or not. The country is currently tied to the British Pound and will vote on Thursday to split from England. The worst fear is that the irreversible decision could bring economic doom and gloom to the United Kingdom, but I’m more worried about the currency wars that might accompany a “yes” vote.
Not only have I mentioned that the “act” of the U.S. going to war would be detrimental to the market, I have also warned of currency wars from time to time that could also have major effects on the market. Gold, silver, copper and other commodities have been falling in recent weeks and, while the U.S. Dollar is rising, there are a number of major countries that are experiencing a lower “dollar” in their country — Canada and Australia are two that come to mind.
When all of these cross currents start to flow, currency wars usually heat up.
Other warning signs could come from companies themselves, as October and third-quarter earnings start to come into focus. There could be possible earnings warnings over the next week or two, as now is the “grace” period for companies to typically warn Wall Street and its investors that they might miss expectations.
The major indexes (Dow and S&P) are just 1%-2% away from all-time highs. Tech and the small-caps are 4% and nearly 10% away from their all-time highs, respectively, so they have some catching up to do. My targets from the end of February are calling for higher highs by year-end, but the near-term waters are getting choppy.
Wall Street is worried about September, but I’m more interested in October. I would love to get confirmation that a 5%-10% correction is coming, as I will use put options to make money for our portfolio. While some call options may pullback, I have used longer-term options to protect the positions from volatility.
Remember — do not be scared to short the market or side with the bears if there is a quick ride to the downside. Although the bears have cried wolf for a few years now, at some point, they will become a force, but the question of when that will happen remains.
Ahead of the open, futures look like this: Dow (-13); S&P 500 (-2.5); Nasdaq 100 (-2.50).
Momentum Options Play List
Closed Momentum Options Trades for 2014: 69-40 (63%). 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.
World Wrestling Federation (WWE, $15.19, up $0.04)
WWE October 16 calls (WWE141018C00016000, $0.50, up $0.05)
Entry Price: $0.45 (9/11/2014)
Exit Target: $0.90
Stop Target: None
Action: Shares traded to a high of $15.88 on Friday before finishing flat. Prior resistance at $15 will now try to serve as support followed by the major moving averages. The next level of resistance is at $17.
The story from this trade is still playing out, as I said that WWE’s selloff in mid-May from $20 to $12 on earnings would create a tremendous opportunity for bullish positions.
The short-interest in the stock is still high at 27%. As higher resistance levels come into play the shorts are covering. With WWE shares at $17, these options would be worth at least $1 for a 100+% return. I love the risk/reward of this trade as long as $15 holds.
MGM Resorts International (MGM, $23.77, down $0.47)
MGM October 24 puts (MGM141018P00024000, $0.85, up $0.20)
Entry Price: $0.65 (9/10/2014)
Exit Target: $1-$1.30
Stop Target: None
MGM November 22 puts (MGM141122P00022000, $0.45, up $0.10)
Entry Price: $0.40 (9/10/2014)
Exit Target: $0.60-$0.80
Stop Target: None
Action: Shares traded to a low of $23.57 on Friday, and a close below $23.50 should lead to $22.50-$22. These levels were tested in April, which is where I would like to close half of the trades.
Flextronics (FLEX, $11.02, down $0.05)
FLEX October 12 calls (FLEX141018C00012000, $0.05, down $0.02)
Entry Price: $0.07 (9/5/2014)
Exit Target: $0.15-$0.25
Stop Target: None
FLEX January 11 calls (FLEX150117C00011000, $0.70, down $0.02)
Entry Price: $0.68 (9/5/2014)
Exit Target: $1.50+
Stop Target: None
Action: Near-term resistance for FLEX stock is at $11.25. If cleared, shares could make another run at $11.75 and fresh 52-week peaks again.
I believe shares are going to make a strong move past $12 in the coming weeks, $14 by year-end. There is risk to $10.75-$10.50 on a drop below $11 and the 50-day moving average.
Fortinet (FTNT, $26.42, up $0.47)
FTNT December 29 calls (FTNT141220C00029000, $1.00, up $0.05)
Entry Price: $0.95 (9/2/2014)
Exit Target: $1.90
Stop Target: None
FTNT September 28 calls (FTNT140920C00028000, $0.15, up $0.05)
Entry Price: $0.55 (6/30/2014)
Exit Target: $0.75 (Limit Order)
Stop Target: None
Action: The 52-week high for FTNT shares is at $26.80, and my near-term has been calling for a run to $28-$30. Support has been solid but shaky at $26, and any dips below this level will force me out of the September calls. These calls were from June and, while I am hoping for a profit, I will likely have to make up the current losses with the December calls.
In my book, Fortinet is a takeover target, as it has some of the best cyber security in the business. Hopefully, a buyout north of $30 comes by Christmas as one of the bigger Internet players makes a bid for the company.
Rubicon (RBCN, $5.94, up $0.09)
RBCN December 8 calls (RBCN141220C00008000, $0.25, flat)
Entry Price: $0.35 (8/25/2014)
Exit Target: $0.70
Stop Target: None
Action: Support for RBCN shares at $5.75 has been holding, and a close above $6.25-$6.50 would be bullish for a run at $7.
Trades on Hold — 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 Open Trades and Closed Trades pages to see all open and closed positions.
S&P 500 Spiders September 180 puts (from August 2014) — Continue to hold.
AKS Steel Holding October 12 calls (from August 2014) and the January 13 calls (from August 2014) — Continue to hold as long as shares stay above $8.50.
Pool October 50 puts (from July 2014) — The break-even point for the trade is at $48.90, technically, by mid-October. These options have nearly six weeks before they expire.