“Turn out the lights, the party’s over
They say that, ‘all good things must end’
Let’s call it a night, the party’s over
And tomorrow starts the same old thing again”

Dear Momentum Options Subscriber,

When I was a kid, my pops would let me stay up late to watch the Monday Night Football game, but the deal was that I had to hit the sack when broadcaster “Dandy” Don Meredith belted out the aforementioned Willie Nelson tune. Sometimes, it would be well into the fourth quarter before the game was decided, but sometimes he would sing it in the third quarter.

These thoughts came to my mind during Monday’s closing bell after watching the bulls attempt a comeback that backfired and snowballed into a pounding by the bears. It was not pretty, and the clues confirmed that lower lows might be in store.

The Dow tanked 223 points, or 1.4%, to settle at 16,321. The blue-chips traded right up to resistance at 16,600 several times and reached 16,602 before the bottom fell out. I talked about the next level of support at 16,350 being tested on further weakness, and the break below this level opened up further risk to 16,200-16,000. Resistance is at 16,500-16,600.

The S&P 500 sank 31 points, or 1.7%, to finish at 1,874. The index tried making a run to resistance at 1,910-1,925, but the 6-pack rally to 1,912 quickly sobered Wall Street on the reversal below 1,900. The bears easily nailed my near-term downside targets of 1,885-1,875 during the final hour of trading. There is additional support at 1,850-1,840. Resistance is at 1,885-1,900.

The Nasdaq got taken to the woodshed after falling 62 points, or 1.5%, to end at 4,213. Tech made a run past 4,300 to 4,303 before closing a point off of its low. I talked about risk to 4,250-4,200 this week but underestimated the volatility, as I was looking for a bullish Monday. The bears will clearly be gunning for 4,000, but there are hurdles for them at 4,150-4,100 where the bulls will put up a fight, if not sooner.

The Russell 2000 slipped 4 points, or 0.4%, to close at 1,049. The action in the small-caps was encouraging, as the bulls cleared 1,060 and nearly kissed 1,067 during the second half of trading. However, the late day pullback and close below 1,050 gets 1,040-1,025 in play.

The S&P 500 Volatility Index ($VIX, 24.64, up 3.40) zoomed 16% and closed above 24 after finishing at its session high. My homework has been warning of risk to 25-30 on a close above 24 on frantic selling, which could hit this week.

I have been warning about Dow 16,000-15,750, S&P 1,800, Nasdaq 4,000 and Russell 950 in a worst case scenario. While I often hope for the best and prepare for the worst when trying to predict market bottoms (and tops), trading this market is still tricky.

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Heading from desk to press, futures look like this: Dow (+49); S&P 500 (+7); Nasdaq 100 (+14).

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 8:30 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.

 

PowerShares QQQ (QQQ, $92.96, down $1.48)

QQQ November 100 calls (QQQ141122C00100000, $0.30, down $0.15)

Entry Price: $0.60 (10/10/2014)

Exit Target: $1.40

Return: -50%

Stop Target: None

Action: Obviously, I was betting on an 80% chance of the market finishing higher yesterday, but the bears beat those odds.

I could have made this a strangle option trade on Friday, as I expected volatility to continue into this week. Closing this trade for a scratch mid-day and buying puts on the breakdown might have been the way to go yesterday. However, I usually refrain from panic selling, and my position was small, as I threw a dart on the bulls starting their comeback this week.

That may or may not happen, but I also don’t want to underestimate any snap-back rally. There is likely another week or so of selling pressure, and a test to $92-$90 could come into play. Resistance is at $95. These options have over a month before expiration.

 

Apollo Group (APOL, $24.20, down $0.69)

APOL November 23 puts (APOL141122P00023000, $1.00, up $0.20)

Entry Price: $0.70 (10/8/2014)

Exit Target: $1.40

Return: 43%

Stop Target: None

Action: I included a longer-term chart below to provide a better picture of the possible breakdown that could be coming.

The last line of support is at $24 before a possible collapse to $21. The $3 gap could accelerate quickly on a move below $24.

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.

Previous comments:

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.

APOL1014

Krispy Kreme Doughnuts (KKD, $16.63, down $0.19)

KKD November 16 puts (KKD141122P00016000, $0.55, up $0.05)

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

Exit Target: $1.20

Return: 38%

Stop Target: None

Action: I have a near-term target of $15 for shares on a break below this level, with a chance at $14-$12. Resistance is at $17.50. Earnings aren’t due out until early December.

 

Fortinet (FTNT, $23.43, down $0.14)

FTNT December 29 calls (FTNT141220C00029000, $0.30, down $0.05)

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

Exit Target: $1.90

Return: -63%

Stop Target: None

Action: Shares traded down to the 200-day moving average and held this level on Friday. There is additional risk to $22. Resistance is at $24.50. Earnings are due on Oct. 22.

 

Rubicon (RBCN, $4.09, down $0.73)

RBCN December 8 calls (RBCN141222C00008000, $0.20, down $0.05)

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

Exit Target: $0.70 (Limit Order)

Return: -43%

Stop Target: None

Action: Support is at $4. Resistance is at $5.

 

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.

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 this Friday. Earnings are due out on Thursday and will ultimately decide the fate of this leftover trade from the summer, as the options expire two days afterwards — Continue to hold.

Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options