Dear Momentum Options Subscriber,

The bears made another appearance to start the week again, as the market fell for the second Monday in a row. The losses were less than 1%, overall, but the bulls need to be careful not to give back too much ground.

The Dow dropped 106 points, or 0.6%, to close at 17,852. The blue-chips tested 17,900 on the open and struggled to reach 17,960 ahead of Wall Street’s lunch break. The 2-point pop faded and got progressively worse into the close, as the index tested a low of 17,804. Support at 17,800 held by a button, and I talked about backup at 17,600 being tested on an overshoot. Resistance added another level and is now at 17,900-18,000.

The S&P 500 slipped 15 points, or 0.7%, to settle at 2,060. The index opened lower but managed to make a half-point gain just shy of 2,076 before stumbling to a low of 2,054. Support at 2,060-2,050 held, but the pullback keeps 2,040 in play. A close below this level would be bearish. I talked about the bulls needing to hold 2,075 for several sessions before a run to 2,100 could come, and this level remains as resistance.

The Nasdaq tanked 40 points, or 0.8%, to finish at 4,740. Tech tested a high of 4,793 at the start and resistance at 4,800, but the 13-point run quickly faded and got nasty in the second half of trading. The bears pushed a low of 4,722 and tested the 4,725-4,700 zone. A close below the latter needs to be watched, as it could lead to 4,650.

The Russell 2000 gave back 15 points, or 1.3%, to end at 1,167. The small-caps were showing promise at the start of trading, as they raced to a high of 1,188. However, the 6-pack party failed at resistance at 1,190-1,200, with support at 1,175-1,170 quickly being tested afterwards. The bears pushed a low of 1,165, and there is backup support at 1,160-1,150. The prior Monday low reached 1,154.

The S&P Volatility Index ($VIX, 14.29, up 2.31) opened above 12.50 and soared to a high of 14.67 on Monday. The bears didn’t have the mustard to test 15, but it was a wakeup call and exemplifies why I say you always have to watch the VIX for clues. I don’t mind shorting the market or a stock in a downtrend, but one day doesn’t qualify as a trend change. I also mentioned that I wouldn’t aggressively seek short positions until there is further damage or 20 is cleared.

The action could get intense over the next four trading days, as the market will try to shake out the weaker hands. There are a few trades entering the “danger zone” and some from the summer that I will be wrapping up, which will leave plenty of room for New Trades going into 2015.

I have tried not to overload the portfolio because the weakness we saw last week could carry over into this week.

The portfolio has made tremendous gains, and I have posted a nice success rate since the mid-October lows when I recommended a ton of call options. The year has also been good to me, but I remember that, in this game, you are only as good as your last trade.

I said we still needed to respect the bears, but that saying works both ways. The naysayers still need to respect the bulls. There is no time to rest, however, as the big money is made from now until the end of January. February is always a rocky month and, for the new trades and ones to come, our game plan will be to take profits just ahead of February’s madness.

Write these down. I rarely have a “cold soda” nowadays, but here is a 6-pack of what I’m watching:

  • The small-cap bounce should begin mid-December, and last week’s breakout could signal a trading range with some spicy volatility. Next Monday is Dec. 15.
  • This week will offer great entry prices to play the rally into 2015. If my indicators turn south, that’s no problem, as it would signal that it is time to roll with the bears. However, puts have been tough bets in recent years, which is why I haven’t aggressively added them. I have had some success with puts this year, but timing is crucial.
  • The VIX held 15, so don’t panic until 20 is tripped. Check out the 10-year chart from Monday’s Pre-Market Update.
  • Don’t worry until the downside 10-year uptrend lines come into play. This was the last thing I mentioned before heading to press Monday morning, and I listed the uptrend levels for each of the major indices as a side note.
  • Watch the financial stocks to see how they hold up. I will provide an update of them later this week.
  • Watch Friday’s close. It could be an important tell or wild card heading into options expiration week. Next Friday is December options expiration week, which is also known as “Freaky Friday” around the Wall Street blocks. It is also called a “Triple Witching” day, which happen four times a year on the third Friday of March, June, September and December. This is when the contracts for stock index futures, stock index options and stock options expire on the same day.

In other words, everything is going according to plan. We will likely take a few hits this week, and today I’m closing one of our positions that has been on “hold,” but the run from the October lows has been a blast. Hopefully, this week offers an opportunity to reload, but let’s play the action a little tight until the hand unfolds.

From desk to press, futures are shaping up like this: Dow (-135); S&P 500 (-17); Nasdaq 100 (-35).

Momentum Options Play List

Closed Momentum Options Trades for 2014: 95-56 (63%). 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.

 

Pfizer (PFE, $31.97, down $0.02)

PFE February 33 calls (PFE150220C00033000, $0.61, down $0.05)

Entry Price: $0.57 (12/8/2014)

Exit Target: $1.15

Return: 7%

Stop Target: None

 

PFE March 33 calls (PFE150320C00033000, $0.71, down $0.07)

Entry Price: $0.68 (12/8/2014)

Exit Target: $1.40

Return: 4%

Stop Target: None

Action: The chart below shows the “triple-top” breakout at $30.50. Triple-tops can also have bearish setups, which would have occurred if shares had tested $28 and failed at support.

The fourth move on the breakout should rise an equal amount to that of the bottom ($28), which is why I have penciled-in a run to $34-$35 by early 2015. I could have used nearer-term options, but I wanted to give the trade enough time to play out.

A “golden cross” is also appearing on the chart, with the 50-day moving average crossing above the 200-day moving average. The 100-day moving average is also moving up. These are bullish setups. Near-term support is at $31.50, and I like this trade as long as $30.50 holds.

PFE1209

I will have a fundamental look at Pfizer in today’s Mid-Market Update. Having both fundamental and chart analysis helps better your odds when planning an option trade, which is why I like to do both. Knowing the risk/reward for your trades will also help to keep your emotions in check.

 

iShares Russell 2000 (IWM, $116.22, down $1.47)

IWM January 121 calls (IWM150117C00121000, $0.62, down $0.32)

Entry Price: $0.90 (12/5/2014)

Exit Target: $1.80

Return: -31%

Stop Target: None

Action: Shares reached a peak of $118.37 after the start of trading before testing a low of $115.85 afterwards. Near-term support is at $115. Resistance is at $118. If cleared, a run past $120 could be in the works. The 52-week high is $120.97.

 

PowerShares QQQ (QQQ, $104.63, down $0.75)

QQQ January 107 calls (QQQ150117C00107000, $0.60, down $0.35)

Entry Price: $0.98 (12/5/2014)

Exit Target: $2.00

Return: -39%

Stop Target: None

Action:  Support is at $105, with $103 serving as backup. I have talked about the QQQs making a run to $110, and the recent 52-week high is north of $106.

 

American Express (AXP, $93.56, up $0.91)

AXP January 95 calls (AXP150117C00095000, $1.40, up $0.30)

Entry Price: $0.75 (12/3/2014)

Exit Target: $1.50 (closed half at $1.40 on 12/8/2014)

Return: 87%

Stop Target: $0.85, raise to $1.00 (Stop Limit)

Action: Raise the Stop Limit from $0.85 to $1.00. Yesterday’s low on the calls checked-in at $1.15.

I suggested closing half of the trade yesterday to lock in profits. The options traded to a high of $1.46 on the run to $93.89.

Resistance is at $94-$95. The 52-week high is at $96.24. Support has moved up to $92.50, with $90 serving as backup.

 

JDS Uniphase (JDSU, $13.24, down $0.08)

JDSU January 13 calls (JDSU150117C00013000, $0.75, down $0.05)

Entry Price: $0.65 (12/3/2014)

Exit Target: $1.30

Return: 15%

Stop Target: None

 

JDSU March 14 calls (JDSU150320C00014000, $0.75, down $0.05)

Entry Price: $0.70 (12/3/2014)

Exit Target: $1.40

Return: 7%

Stop Target: None

Action: Resistance is at $13.50-$13.75. If cleared, a run to $14-$15 should be in the works. Support is at $13 and the 50-day moving average. There is additional risk to $12.50 and the 100/200-day moving averages on a close below $12.75.

You can read my full update on JDSU in the Dec. 3 Alert.

 

Diamond Foods (DMND, $29.01, down $0.22)

DMND December 32 calls (DMND141220C00032000, $0.40, down $0.20)

Entry Price: $0.87 (11/18/2014)

Exit Target: $1.75, lower to $1.00 (Limit Order on Half)

Return: -54%

Stop Target: None

Action: Set Limit Orders to close half of the trade at $1.00.

Shares were up 2% in after-hours trading on Monday after the company beat Wall Street’s expectations. The $0.04 beat came on revenue of $246 million.

I am not sure if the limit order of $1.00 will trigger, as these options are still out of the money. I’m hoping that shares can catch fire after the open once Wall Street notices the company’s nice quarter. I will have an update on where the trade stands this afternoon, but I’m a little worried that the premium left in the call options could take a hit.

 

 

IMAX (IMAX, $30.16, down $0.30)

IMAX December 32 calls (IMAX1220C00032000, $0.15, down $0.10)

Entry Price: $0.35 (11/12/2014)

Exit Target: $0.70 (Limit Order on Half)

Return: -57%

Stop Target: None

Action: Shares need to make a move this week, as the trade is running out of time. These December options expire next Friday. Support at $30 has been solid, but I would like to see resistance at $31.50-$32 cleared by this Friday.

 

International Business Machines (IBM, $161.86, down $1.41)

IBM January 170 calls (IBM150117C00170000, $0.60, down $0.20)

Entry Price: $1.75 (11/10/2014)

Exit Target: $3.50

Return: -66%

Stop Target: $0.50

Action: Support is at $160 following the drop below $162.50, which will now serve as short-term resistance.

 

Flextronics (FLEX, $10.98, down $0.31)

FLEX January 11 calls (FLEX150117C00011000, $0.40, down $0.15)

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

Exit Target: $1.25

Return: -40%

Stop Target: None

Action: Shares traded to a high of $11.37 before a nasty backtest to support at $11. There is additional help at $10.75, and a close below this level might force me out of the trade. Shares were back above $11 in after-hours, but new resistance is back in play at $11.25.

 

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.

Rubicon December 8 calls (From August 2014) — Monday’s 7% pullback was the nail in the coffin for this trade from August. There is still a nickel in premium, so sell to close the trade this morning on the open.

Fortinet December 29 calls (from September 2014) — Continue to hold.

Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options