Wednesday’s best day on Wall Street for the year turned into one of the worst on Thursday, as volatility remained insane. The major indexes closed below their first waves of support and are still in danger of testing their 200-day moving averages following the pullback.
The Dow dropped 335 points, or 2%, to end at 16,659. The blue-chips traded in negative territory throughout the session and dropped below 16,800 mid-day. The bears pushed a low of 16,649, and support at 16,600 held. Resistance is at 16,800-17,000 again, while a close below 16,600 could lead to 16,350. The lower low was bearish, with the index closing at its lowest level since mid-August.
The S&P sank 40 points, or 2.1%, to finish 1,928. The index tested a low of 1,927 but held support at 1,925. The higher low from Wednesday’s test to 1,925 was slightly bullish, but there is risk to 1,910-1,900 if this level fails to hold. Resistance is at 1,940 followed by the battleground at 1,950.
The Nasdaq tanked 90 points, or 2%, to close at 4,378. The battle over the 4,450 level lasted throughout the first half of trading before Tech tested a low of 4,377. I wanted to see 4,400 hold into the close, but the higher low bettered Wednesday’s trip to 4,355. This was a slightly bullish sign, but the close below 4,400 keeps 4,350 and possibly 4,300 in play,.
The Russell 2000 got hammered for 29 points, or 2.6%, and settled just below 1,068. The small-caps tried to hold the 1,090 level at the start of trading but faded 30 minutes after the open. I talked about risk to 1,075-1070, and the bulls were doing a good job holding this level before the bears pushed a low of 1,067 into the closing bell. There is continued risk to 1,060-1,050 and fresh 52-week lows on further selling pressure. The lower low was bearish. Resistance is at 1,075-1,080.
The S&P 500 Volatility ($VIX, 18.76, up 3.65) zoomed 24% and reached a peak of 19.38. The VIX came within a stone’s throw of triggering my upside target of 20-22 and remains elevated. The bulls failed at getting below 15 for the fourth straight session, with 17.50 now becoming short-term “resistance.”
The key reversal on Wednesday was just as damaging as Thursday’s move, as the technical outlook for the market remains influx. It has been three years since the Dow has experienced these types of moves, and the volatility could continue into next week.
October options expiration is next week, and this will only add to the current volatility. Third-quarter earnings season kicks into second-gear next week, with a number of heavy-hitters reporting. This will also add to the chaos. A test to the 200-day moving averages is likely at this point if there is no rebound today.
There may be an opportunity to use straddle or strangle option trades, given the current volatility, to protect portfolios from the wild price swings. Although most of my trades are geared towards triple-digit profits, these option strategies can produce nice double-digit profits in these types of environments. I have talked about the possibility of a new trend forming once volatility settles, but that outlook remains cloudy.
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Heading from desk to press, futures look like this: Dow (-62); S&P 500 (-7); Nasdaq 100 (-32).
Momentum Options Play List
Closed Momentum Options Trades for 2014: 79-49 (62%). 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.
Apollo Group (APOL, $25.96, up $0.27)
November 23 puts (APOL141122P00023000, $0.55, down $0.10)
Entry Price: $0.70 (10/8/2014)
Exit Target: $1.40
Stop Target: None
Action: Resistance 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, $16.89, down $0.37)
KKD November 16 puts (KKD141122P00016000, $0.45, up $0.05)
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, $24.36, down $0.58)
FTNT December 29 calls (FTNT141220C00029000, $0.45, down $0.10)
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