The bears are doing a good Van Morrison impression this week and took another step towards cracking major support following Tuesday’s drubbing. It’s been nearly three years since Wall Street has experienced a 10% pullback, and the law of averages will eventually catch up with the bulls. Although it is still too early to tell if the current pullback will be the one that ends the streak, the bears are getting aggressive and have momentum.

The Dow declined 116 points, or 0.7%, to close at 17,055. The blue-chips spent their second-consecutive session underwater and nearly came up for air thirty minutes after yesterday’s open, but failed by a point. The bears held the index below 17,100 by the closing bell, as the Dow went out as its session low. A drop below 17,000 could lead to 16,800 this week. Resistance is at 17,200 followed by 17,350.

The S&P 500 fell 11 points, or 0.6%, to finish at 1,982. The index opened in negative territory at 1,992 before making a run into positive to 1,995 shortly after the open. However, the bears were able to get below 1,985, and I mentioned a close below this level could lead to 1,975-1,970 this week. Additional support is at 1,960-1,950. Resistance is at 2,000.

The Nasdaq got spanked for 19 points, or 0.4%, to settle at 4,508. Tech started weak but tried to look strong on its push 4,536, but the 9-point pop quickly turned into a 26-point drop into the close. The bulls held 4,500, but there is risk to 4,450-4,400 on a drop below this level. Watch 4,475 for confirmation. Resistance is at 4,525-4,550.

The Russell 2000 tumbled 10 points, or 0.9%, to end at 1,118. The small-caps opened 3-points lower at 1,126 before trading to a high of 1,131 during the first hour of trading. However, support at 1,125 was penetrated during the second half of trading, as the index also ended at its session bottom. The last wave of support before panic selling, or flood buying begins, is at 1,100. My feeling is this will be the battle ground going into third-quarter earnings season. From there, a 50-point move is possible during October. This is what I am planning for, so patience will be key over the next few weeks.

I warned of the possible “death-cross” forming on the Russell 2000 weeks ago and, needless to say, the suit-and-ties were trying to look smart by pointing out the 50-day moving average (MA) has fallen below the 200-day MA. This is after the fact of course, but this bearish indicator usually signals continued weakness. However, the last time this bearish signal formed was in July of 2012 at 765, as you can see from the chart below, and the bulls held.

RRMO2

The S&P Volatility Index ($VIX, 14.93, up 1.24) surged 9% and came within spitting distance of triggering 15. I have been warning to watch this level all month, and a close or pop above this level could have Wall Street saying “uncle.” The bulls need to reclaim the 13.50 level, quickly, to stop the knuckle-breaking.

Besides the main indicators I monitor daily, one sector I’m watching in particular this week is the financial sector. The Financial Select Spiders (XLF, $23.33, down $0.16) recently traded up to a fresh 52-week peak last week, but the breakout above $23.40 is fading, as you can see from the chart below. If the bulls can’t recover this level, there is risk to $23 and the 50-day moving average. This will also weigh on the indexes if the financial stocks continue to show weakness.

RRMO1

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Ahead of the open, futures are shaping up like so: Dow (+42): S&P 500 (+5); Nasdaq (+12).

Momentum Options Play List

Closed Momentum Options Trades for 2014: 72-46 (61%). 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.

All prices given in this update are current as of 9:00 a.m. EST.

Every new Momentum Options recommendation is listed with the price at which I entered my own position. If the price is slightly different than my recommended entry or exit price when you receive the alert, don’t let that keep you from getting into or out of a trade. Occasionally, you might even get a better “fill” price than what is posted in the Open Trades and Closed Trades.

 

I often say calling market tops and bottoms is never easy, but the technical clues have been golden lately. However, some of the current call options are trading lower.

I have been using “cheaper” call options when we entered September, as I mentioned it would be a volatile month. I refer to “cheap” options on premiums under $0.50-$0.75. I always want to be “in” the market, and I limited my exposure by using Stop Limits to cut some trades. The ones I have kept open from August and earlier this month have longer-term dated options and have good fundamental stories behind them.

I am also looking for the higher-priced premium options ($0.75-$1.50) on the recent put options to help offset some of the pullback. I do expect the call options to be profitable come November, December and January.

I also don’t want to get overzealous on loading up on put options because they have been a mostly losing bet in a bullish market this year. There have been opportunities to go short, as MGM was a nice recent ride, but the story, fundamentals and chart work have to line-up.

When there is a clear trend like the one we rode from June through August and the summer rally, trading becomes easy. Preparing for the next major breakout or breakdown takes a little patience, but I will let you know when to back the truck up for the next batch of call (or put) option plays.

My promise to you is that if you read my letters twice a day and follow my charts and stocks, you will learn more in a year than most Wall Street traders will learn in a lifetime.

Thanks for all of the positive feedback. Keep the emails coming — the good, the bad and the ugly, and I will do my best to update any questions you may have. Now, on to the current trades.

 

General Motors (GM, $33.22, down $0.22)

GM December 32 puts (GM141220P00032000, $0.95, up $0.10)

Entry Price: $0.95 (9/22/2014)

Exit Target: $1.90

Return: 0%

Stop Target: None

Action: Yesterday’s low was $33.13, with GM holding $30. Shares appear ready to trade down to $32.50 over the near-term. I believe GM could fall below $30 and test $28 in the longer term. If shares trade down to $30 by mid-December, these options will easily double from the entry price, as they will be worth at least $2. At $28, the options will be worth $4 and would represent a 320% return.

 

Apollo Group (APOL, $25.36, down $0.34)

APOL November 24 puts (APOL141122P00024000, $1.00, up $0.10)

Entry Price: $0.85 (9/22/2014)

Exit Target: $1.70

Return: 18%

Stop Target: None

Action: I have a near-term target of $24, with a chance of shares testing $22-$20. I have been bearish on this stock for years and have been targeting a test to the mid-teens at some point. A break below $24 is the last line of support and represents the 100-week moving average. There is risk to $28 on a back test, but resistance will try to hold at $26.

Side Note: Corinthian Colleges (COCO, $0.13) is reporting earnings today — or a lack thereof — after announcing they were closing and trying to sell their 107 campuses in the U.S. and Canada back in July. Obviously, the news won’t be impressive, and I’m looking for the results to drag Apollo Group shares lower.

COCO is under investigation by 20 state attorneys and has been delayed in getting federal aid. I have been reporting on the student debt loan crisis for years between the schools and the government, which has been financed by you and me and the rest of the tax-paying people of America. The bubble is finally bursting, and I like APOL to play the explosion.

 

Staples (SPLS, $12.81, down $0.01)

SPLS December 14 calls (SPLS141220C00014000, $0.35, flat)

Entry Price: $0.45 (9/18/2014)

Exit Target: $0.70-$0.90

Return: -22%

Stop Target: None

Action: A close above $13.20 would be bullish. I have a near-term target of $14 and a longer-term target of $17. The 52-week high is at $16.67. The open interest in these call options is over 18,000 contracts and continues to build. The 50-day moving average (MA) recently crossed over the 100-day MA, and shares are in a nice uptrend. Support is at $12.60-$12.40 and the 200-day MA. These options have three months before expiration, so we have plenty of time to ride out the short-term volatility.

 

Freeport-McMoRan (FCX, $32.96, down $0.21)

FCX November 36 calls (FCX141122C00036000, $0.25, down $0.05)

Entry Price: $0.70 (9/16/2014)

Exit Target: $1.05-$1.40

Return: -64%

Stop Target: None

Action: There is risk to $32.50 on further selling pressure. These options have two months before they expire, and I like the trade as long as $32 holds up.

 

Flextronics (FLEX, $10.79, up $0.11)

FLEX October 12 calls (FLEX141018C00012000, $0.05, flat)

Entry Price: $0.07 (9/5/2014)

Exit Target: $0.15-$0.25

Return: -29%

Stop Target: None

 

FLEX January 11 calls (FLEX150117C00011000, $0.55, up $0.05)

Entry Price: $0.68 (9/5/2014)

Exit Target: $1.50+

Return: -18%

Stop Target: None

Action: Support is at $10.75-$10.50. Near-term resistance is at $11-$11.25. If cleared, shares could make another run at $11.75 and fresh 52-week peaks. I believe shares are going to make a strong move past $12 in the coming weeks and $14 by year-end.

 

Fortinet (FTNT, $25.51, down $0.57)

FTNT December 29 calls (FTNT141220C00029000, $0.70, down $0.15)

Entry Price: $0.95 (9/2/2014)

Exit Target: $1.90

Return: -26%

Stop Target: None

Action: Support at $25.50 and the 50-day moving average was tested yesterday. A close below this level would be bearish and could lead to $25-$24. Resistance is at $26.

 

Rubicon (RBCN, $4.77, down $0.20)

RBCN December 8 calls (RBCN141220C00008000, $0.10, down $0.05)

Entry Price: $0.35 (8/25/2014)

Exit Target: $0.70

Return: -71%

Stop Target: None

Action: There is risk to $4.75-$4.50. Resistance is at $5.25.

I still like the trade, as open interest is massive in these call options. The short-interest is also ballooning, with 30% of the float sold short. Analysts are expecting a terrible quarter, but the company has beaten loss estimates two of the past four quarters.

This is a sapphire play that has until December before the trade expires. These were “cheap” options, so stay patient, as a big payday, or buyout of the company, could be coming.

 

Trades on Hold — other 2014 Portfolio Open positions (2): 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.

AKS Steel Holding October 12 calls (from August 2014) and January 13 calls (from August 2014) — Continue to hold.

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 a month before they expire — Continue to hold.