The bears continued their assault into Tuesday’s close, as the major indexes finished below significant levels of support. Coming into the week, I mentioned another back test was a strong possibility, as I expected last week’s lows to get tested. The rest of the week could get challenging for the bulls if support gets stretched and a new trend emerges.

The Dow dropped 272 points, or 1.6%, to end at 16,719. The blue-chips tried to hold 16,800 into the closing bell, but the bears got below this level and reached 16,715. I have talked about risk to 16,600, and last week’s low touched 16,674. A break below this level will likely lead to 16,500-16,350. I would love to see a dip to 16,350, as it represents the August and May lows and would possibly form a “triple-bottom.” Resistance is now at 16,800-17,000.

The S&P 500 sank 29 points, or 1.5%, to close at 1,935. The index held 1,950 for the majority of the session, but the drop below 1,940 late in the day signals another test to 1,925, possibly 1,900. Resistance is at 1,940-1,950.

The Nasdaq tanked 69 points, or 1.6%, to finish at 4,385. Tech opened below 4,450 at 4,433 and held the 4,400 level until the final hour of trading. The bears pushed the action into the close, as the Nasdaq finished at its low and faces further risk to 4,350-4,300. Resistance is at 4,400-4,450.

The Russell 2000 declined 18 points, or 1.7%, to settle at 1,076. The small-caps struggled to hold 1,090-1,085 and also ended at session lows. The bears triggered a fresh low for the year on the index, but the bulls held 1,075 by the skin of their teeth. This was one of the main clues I have said to watch for this week (along with the VIX), as I said a close below this level would be very bearish. While support could get “stretched” to 1,070-1,065, any closes below these levels could lead to a test to 1,040 and fresh 52-week lows.

The S&P Volatility Index ($VIX, 17.20, up 1.74) soared 11% and reached a high of 17.46. The bulls held 17.50 again, which has been tested in four of the past seven sessions and continue to face risk to 20-22 on a close above this level.

I have been mentioning that once a clear trend develops there could be a pleasant year-end upside surprise or a nasty correction coming. The back-and-forth volatility has been extreme, and I noted the VIX could stay elevated this week. This is an incredibly choppy market and still too early to load up on calls or puts, as it remains to be seen if the latest dip is going to be bought by Wall Street or not. We just need to be patient for another day or two.

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From desk to press, futures look like this: Dow (+23); S&P 500 (+4); Nasdaq 100 (+7).

Momentum Options Play List

Closed Momentum Options Trades for 2014: 76-49 (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.

 

McDonald’s (MCD, $92.81, down $1.03)

MCD November 90 puts (MCD141122P00090000, $1.10, up $0.30)

Entry Price: $0.90 (10/2/2014)

Exit Target: $1.80

Return: 22%

Stop Target: 92 cents (Stop Limit)

Action: We got our close below $93.50 and the 50-day moving average, which should lead to a test of $90. I have placed an initial Stop Limit of 92 cents on the position to protect profits. I will raise it as shares continue to sink, but, if there is a rebound, the position is protected from a loss.

 

Krispy Kreme Doughnuts (KKD, $16.86, down $0.21)

KKD November 16 puts (KKD141122P00016000, $0.50, up $0.05)

Entry Price: $0.40 (10/1/2014)

Exit Target: $1.20

Return: 25%

Stop Target: None

Action: The close below $17 sets up a test to $16.50. I have a near-term target of $15 for shares on a break below this level, with a chance at $14-$12. Earnings aren’t due out until early December, but they could warn if the quarter was weak. Resistance is at $17.50.

 

Staples (SPLS, $11.49, down $0.31)

SPLS December 14 calls (SPLS141220C00014000, $0.10, down $0.05)

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

Exit Target: $0.70-$0.90

Return: -78%

Stop Target: None

Action: Support at $11.50 is in play, with additional risk to $11.25-$11. The next catalyst for a turnaround comes in November when the company reports earnings. I want to keep this trade open and will place it on hold until there is a rebound back above $12.

 

Fortinet (FTNT, $24.34, down $0.78)

FTNT December 29 calls (FTNT141220C00029000, $0.50, down $0.10)

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

Exit Target: $1.90

Return: -47%

Stop Target: None

Action: There is risk to $24.50-$24 on a pullback. Resistance is at $25.50-$26.

 

Trades on Hold — other 2014 Portfolio Open positions (4): 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 January 13 calls (from August 2014) — Continue to hold.

Flextronics October 12 calls and January 11 calls (from September 2014) — Continue to hold.

Pool October 50 puts (from July 2014) — The bid/ask on these options is wide but continues to build. The trade was recommended at $1.10, and the spread is $0.05/$1.00. The break-even point for the trade is at $48.90, technically, by next Friday. Earnings are due out on Oct. 16 and will ultimately decide the fate of this leftover trade from the summer, as the options expire two days afterwards — Continue to hold.

Rubicon December 8 calls (from August) — Shares traded to $4.75 yesterday. Water-cooler talk is that the company could become Apple’s (AAPL) scratch-resistant sapphire screen display supplier after GT Advanced Technologies (GTAT) claimed bankruptcy earlier this week — Continue to hold.

 

Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options