The market made a key reversal on Wednesday after taking out last week’s lows and recovering prior resistance. The rally started shortly after the Federal Open Market Committee (FOMC) minutes were released, and the dovish tone and global concerns were a surprise. The “global concerns” seem to be a new wrinkle the Fed is worried about, as they often refrain from making these types of comments. However, Wall Street loved the news, and buyers went bargain hunting.
The Dow zoomed higher by 274 points, or 1.6%, to finish at 16,994. The blue-chips dipped to a low of 16,663 during the first half of trading, but support at 16,600 was never challenged. The choppy action turned positive while the suit-and-ties were out to lunch and easily cleared 16,800 on the Fed minutes. The bulls made a run past 17,000 to a high of 17,006 and held two layers of support into the close — 16,900-16,800. Resistance is at 17,150-17,200, and a close above the latter should get 17,350 in play again.
The S&P 500 surged 33 points, or 1.8%, to settle at 1,968. The bears pushed my near-term target of 1,925 and came within a quarter-point of cracking this level. Last Thursday’s low of 1,926 was taken out, but the rebound was picture perfect, as the bulls reached a peak of 1,970. I was rooting for a close above 1,975, but the recovery of 1,950 and then 1,960 was bullish. These levels will try to serve as short-term support, and a close above 1,975 should get 2,000 back in play.
The Nasdaq exploded 83 points higher, or 1.9%, to close at 4,468. Tech came within spitting distance of taking out my near-term downside target of 4,350, but, when this level held, I had a good feeling a bottom might be in. The recovery to 4,400 and then 4,450 was impressive, as the bulls pushed 4,473 into the close. Further resistance at 4,475-4,500 lies ahead, but a close above 4,500 gets 4,600 back on the map.
The Russell 2000 soared nearly 21 points, or 1.9%, to end at 1,097. I talked about support getting “stretched” to 1,070-1,065, and the bears fell right into the bullish trap after kissing 1,065 on the nose. The rebound back above 1,175-1,180 was bullish, but the run to 1,100 was even more exciting. The small-caps went out near their session high and face additional risk at 1,115-1,125 if 1,100 clears. I would like to see 1,985 hold on a slight pullback, but there is risk to 1,175-1,170 if it doesn’t.
The S&P 500 Volatility Index ($VIX, 15.11, down 2.09) fell 12% after testing a high of 18.03. The VIX was holding the 17.50 level going into the Fed minutes and started pushing 15 soon afterwards. The bulls got the VIX down to 14.97 ahead of the closing bell and face additional hurdles at 13.50 and then 12.50.
I know one day doesn’t make a trend, but it looks as though our patience may have paid off if yesterday was a temporary bottom. The rebound back into the trading range, and one that I said could get expanded, was sweet. However, continued follow-through for the rest of the week is needed.
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Heading into the opening bell, futures are shaping up like this: Dow (-22); S&P 500 (-0.5); Nasdaq 100 (+1.75).
I could have New Trades this morning shortly after the open, so stay close to your email inbox or listen for a text alert if you have signed up for the service.
Momentum Options Play List
Closed Momentum Options Trades for 2014: 77-49 (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.
S&P 500 Spiders (SPY, $196.64, up $3.38)
SPY November 200 calls (SPY141122C00200000, $1.85, up $0.80)
Entry Price: $1.25 (10/8/2014)
Exit Target: $2.00-$2.50
Stop Target: $1.30 (Stop Limit)
Action: These options were heavily traded on Wednesday, as nearly 18,000 contracts traded. They reached a peak of $1.90, and I have set two exit targets, but they are not Limit Orders. I may close half of the trade in between $2.00-$2.50, depending on the action, so I would rather monitor the action before taking half-profits.
I have set a Stop Limit order of $1.30 given the current volatility and in case there is a whipsaw pullback. I don’t think this will be the case, but, if so, the trade won’t lose money.
PowerShares QQQ (QQQ, $98.45, up $1.88)
QQQ November 99 calls (QQQ141122C00099000, $1.90, up $0.67)
Entry Price: $1.40 (10/8/2014)
Exit Target: $2.10-$2.80
Stop Target: $1.45 (Stop Limit)
Action: I am expecting the QQQs to make another run past $100 over the near-term if the current momentum holds. The 52-week peak is at $100.56. I have set a Stop Limit of $1.45 to ensure the trade isn’t a loss on a pullback.
Apollo Group (APOL, $25.69, up $0.46)
APOL November 23 puts (APOL141122P00023000, $0.60, down $0.05)
Entry Price: $0.70 (10/8/2014)
Exit Target: $1.40
Stop Target: None
Action: Resistance for APOL common stock is at $26, and I like the trade as long as $28 holds. This wasn’t intended to be an earnings trade, as I have covered Apollo’s chart work frequently in the past. However, if we are still holding the options, it will become an earnings trade when the company announces earnings on Oct. 21.
Wall Street has pegged the company earning 27 cents a share on revenue of just shy of $729 million. The range, however, could produce an earnings surprise or serious miss. The 27 analysts that cover the stock have a high of 35 cents a share and a low of 19 cents a share.
Long-time subscribers know I have been bearish on this stock for years. With student debt over $1.2 trillion, Apollo will be the first to crumble as this story gets worse. I have said this is a mid-teen stock at some point down the road. I believe shares could test $20 by mid-November.
Krispy Kreme Doughnuts (KKD, $17.26, up $0.50)
KKD November 16 puts (KKD141122P00016000, $0.40, down $0.10)
Entry Price: $0.40 (10/1/2014)
Exit Target: $1.20
Stop Target: None
Action: Resistance is at $17.50. 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 lousy.
Fortinet (FTNT, $24.94, up $0.60)
FTNT December 29 calls (FTNT141220C00029000, $0.50, flat)
Entry Price: $0.95 (9/2/2014)
Exit Target: $1.90
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 (5): 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.
Staples December 14 calls (from September) — Continue to hold.
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 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) — 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 — Continue to hold.
Editor and Chief Options Strategist