Dear Momentum Options Subscriber,
“Everybody, listen to me
And return me my ship
I’m your captain, I’m your captain
Though I’m feeling mighty sick
I’ve been lost now for days uncounted
And it’s months since I’ve seen home
Can you hear me? Can you hear me?
Or am I all alone?”
On Fridays, I often play an office tune to reflect the current market sentiment as a way to wind down the week. I have spun some classic tunes over the years, and some of my favorites are “Squeeze Box,” “Jailbreak,” and the one above, of course, “I’m Your Captain” from Grand Funk Railroad.
Aside from that, I watched Rounders this past weekend. Classic movie. I wish they would make a sequel because playing poker and the stock market can feel like the same game.
I stayed relaxed and I hope you did, as well, because the game plan went swell. However, the upcoming action is still a mystery, and it’s up to me to trust my instincts and the hand Wall Street has dealt us going into the “river” and “turn.”
My notes from Friday and last week’s action have me calling the bears’ bluff. I said the bears might go “all-in” on a Texas Hold ‘Em flop with nothing. However, I still have to worry what kind of hand they are holding. If they have pocket aces, last week’s flop becomes much more important. The bulls have been cashing chips to higher-highs all year long, and I’ve done well following their lead. I said last week’s action would shock Wall Street and have the weaker hands folding.
I have a lot to cover, so it is crucial that you absorb today’s information. I’ve done all the homework for you, and the portfolio is the proof in the pudding that this is exactly what I wanted to see happen last week.
Hopefully, history repeats itself as I will talk about some bullish trends, other market news and what to watch for.
Greece, China and oil worried Wall Street last week, with elevated volatility soaring as the bears awoke from their winter hibernation. Their growl scared away Wall Street pros and the Average Joes, as the second and third layers of support were tested by mid-week and into Friday’s close.
I mentioned that the weaker hands would fold like cheap lawn chairs ahead of a possible year-end rally that should (key word “should”) start today. However, this week promises to be just as volatile with the expiration of December options on Friday, the Hindenburg Omen and Triple Witching all in play.
The Dow dropped 315 points, or 1.8%, to close at 17,280 on Friday. The blue-chips were holding near-term support at 17,400-17,350 for much of the session before the late-day plunge to the 50-day moving average. This level will now serve as resistance. There is additional risk to 17,250-17,000 and the 100-day moving average on further weakness. I would be surprised but not shocked if 16,800 and the 200-day average come into play.
The S&P 500 stumbled 33 points, or 1.6%, to settle at 2,002. I was worried about shaky support at 2,025, as I said that a break below this level could lead to 2,000. The index held this level but was saved from any further declines by the closing bell. The bears fell short of cracking the 50-day moving average, but there is risk to 1,975-1,950 on a close below the 100-day moving average.
The Nasdaq tanked 54 points, or 1.2%, to end at 4,653. I warned of the bears making push into the 4,675-4,650 zone, and Friday’s action came right on cue. Although I’m excited that it was a possible bottom, there is additional risk to 4,600-4,575 and the 50-day moving average. A recovery of resistance at 4,700 and prior support will be the first bullish clue to look for on a rebound.
The Russell 2000 sank 14 points, or 1.2%, to finish at 1,152. The small-caps opened at 1,160, and I wanted to 1,150 hold into the close. It did, but not by much. There could be some “stretch” to 1,140-1,135 if the bears keep their momentum. A close below this area could setup the potential for a drubbing to 1,125-1,100, which is where I would back the truck up. I would like to see the bulls reclaim 1,160 today. There would be additional resistance at 1,170-1,175, but let’s clear the first hurdle and see where Monday closes before getting excited.
The S&P Volatility Index ($VIX, 21.08, up 1.00) zoomed to a high of 23.06 in the final minutes of Friday’s action and closed above 20 for the second-straight session. I warned of additional risk to 22.50-25 and, at this point, 30 isn’t out of the picture.
The VIX closing above 20 was a major deal. I talked about how a close above 20 would be bearish, and I said not to “panic” until the bears won this level. Panic was probably not my best mental note, as I wanted to see panic on Wall Street, but I don’t want you to panic.
I still need to confirm the lows are in, but there is way more upside potential if a rally or rebound resumes. However, at this point, there could be just as much downside action.
The last time the VIX closed above 20 was in mid-October when the index traded above this level for six sessions. This could be the one negative for the bulls, as additional closes above 20 this week would signal weaker stock market prices.
Each week, there are a number of indicators I write down, add or change to get a feel for market direction. Last week, I listed my Top Six on a post-it note to get a good read on the bears and what kind of hand they were holding. These were my notes:
- “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.
- 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.”
These were my mental notes, and the action played out like a fiddle.
The bears started the week with a second-straight Monday win, and the action set the tone for the rest of the week. I wasn’t worried about any possible pullback until Friday, as I wanted to keep my emotions in check and wait until the dust settled. I started building my bullish Watch List as stocks went on sale, and I also looked at the short side and possible bearish put options ideas just in case I have to go to “Plan B.”
The bulls had won three-straight Fridays before this past Friday’s beat down, and I said it would be an important session to determine how this week plays out.
Mixed Monday/Friday closes signal trading ranges, which is why I prepared for one at the start of December with the possibility of a pullback. New highs were set, and new lows were breached. I predicted spicy volatility, but last week’s action was served with some Sriracha!
Lower Monday/Friday closes usually mean money is moving out of the market, so today will be just as important as the Mondays in recent weeks, especially with Friday’s pullback on the Dow.
The last time the Dow had a Monday/Friday pullback was in early October, which is right when I said a bottom would be forming. In mid-September, a lot of investors panicked and bailed on the bulls. Not me. Momentum Options has posted a 22-6 from the start of October thru last Friday. This is a success rate of 78.5%.
I say all of this not to brag or boast but to show you that you need to trust the game plan. In late September and early October, I wasn’t buying bullish near-term options, as I said there would be a major swoon into October. A lot of investors “freaked out,” and I don’t want you to be this type of investor or trader. In November, I warned of a weak start to December and tax-selling season, and said that the VIX would be a major clue to watch. Well, here we are.
I still want to improve on this track record, and this time of year has been great to Momentum Options over the past few years. It has been a while since I have recommended shorting a stock or buying longer-term put options, but there are some names I like if the action favors the bears next year.
If you read my updates twice a day, I will teach you about the market, and you will begin to truly understand how the market works, how to spot support and resistance, learn to trust your instincts and to always keep an open mind on how to make successful trades.
The bears pushed the 50-day moving averages on the broader market, but tech and the small-caps held up well. October’s slide led to a breakdown in all of the major indexes below their 50-, 100- and 200-day moving averages. This is why Wall Street is “on the fence” this week. I will likely open a few new bullish trades this week, but I also know that the bearish ambush could get stretched into this week.
The good news for the bulls is that the Mondays before December option expiration week usually show a gain. During the past 13 years, the S&P 500 has closed higher nearly 70% of the time to start the week and hopefully it will give the blue-chips a lift.
December options expire this week, which I mentioned in my Top Six list of things to watch last week. Fancy words like “Triple-Witching,” “Quadruple-Witching” and “Freaky Friday” are all Wall Street code for the expiration of December options this Friday.
I will be ignoring the noise and slick-talking pros, as history shows that this Friday is actually a bullish session as well. The S&P 500 has finished higher 70% of the time over the past three decades. I like the fact that history is favoring the bulls, but I also have to realize that it may not repeat itself this week.
I was all over the pending breakdown in Brent oil ($BRENT) and said that lower oil prices would be a major bonus for the consumer. Crude oil tanked below $60 for the first time in five years, and gas prices have fallen daily for nearly three months.
My No. 1 concern last week was the Russell 2000, as I knew the index would be the most volatile. I mentioned that the small-cap bounce should start today, so that index will be my main focus. The index held its 200-day moving average, but notice the 50-day moving average in the chart above, as it is quickly slopping upward with a “golden cross” formation in the works. This is a bullish signal and one Wall Street will hopefully notice after the fact.
The financial stocks pulled back following negative headlines from Bank of America (BAC, $17.13, down $0.34) and Citigroup (C, $53.40, down $0.11). BofA said their trading revenue would decline for the current quarter, while Citigroup announced job cuts and was fined, along with other banks, for its shenanigans for trying to drum-up its investment-banking business.
I have talked repeatedly about the financial stocks needing to lead the next leg of the market higher, and they had into the first week of December. They were my number five concern.
Last week’s volatility weighed on the sector, as the Financial Select Spiders (XLF, $24.14, down $0.48) slipped 4% from Monday’s high of $25.07, including Friday’s 2% pullback when the bears doubled down. Support at $24 held, but there is risk to $23.75 and the 50-day moving average.
Although the financial stocks were and could still be peaking, they are about the only market sector that hasn’t reached historic highs this year despite the Dow and S&P’s record runs. In fact, the sector has lagged the overall bullish run for the past five years. I would love to see them lead the run higher into 2015 (along with tech and the small-caps).
The talking heads and Wall Street pros seem so stressed about when the Fed will raise interest rates, but I mentioned that rising loan rates would be huge for financial stocks. Banks, which have suffered from years of historically low rates, need to lower their lender standards, and they may be ready to loosen their reins now that the Fed is gone. If there is a little give-and-take between the big banks and borrowers, the rebound to higher highs should continue in 2015.
There has been some chatter about the “Hindenburg Omen,” which officially triggered at the beginning of the month. The technical indicators that make up this fancy pattern usually call for a bear market pullback. The selloff in the energy sector was the hammer that hit the bullet, as a number of them have been put out to pasture.
The Hindenburg Omen theories don’t usually hold up well in bull markets and occur when a substantial number of stocks set either new 52-week peaks or fresh 52-week lows, but not both at the same time. The omen also assumes that the market is acting “normal,” but the volatility in oil actually negates this theory.
Last week offered great entry prices to play a possible rally into 2015, which was my No. 2 priority as I built my Watch List. The indicators I follow on a daily basis were stretched and tested, and I used the chaos to remind myself to start buying when others were fearful.
I still have no problem shorting a stock or buying put options, but I am a trend trader, and most of my positions have been bullish all year. I learned in 2013 that it is hard to trade puts in these types of incredible bull market rallies. In 2008, I had no problems riding shotgun with the bears and buying put options, but let’s wait until the 10-year uptrend lines crack before jumping off of the bullish bandwagon.
Last week, I said to watch the 10-year uptrend lines, which was my fourth major worry on my “Top Six.”
“The current 10-year charts show downside risk to Dow 15,500; S&P 1,900; Nasdaq 4,000; and Russell 1,100 before the longer-term uptrend lines would be in play. If the small-caps fade below 1,150 and then 1,100, there is a good chance 2015 turns bearish.”
You can review the 10-year charts and uptrend lines in the Dec. 8 Pre-Market Update. I doubt that these levels come into play over the next few weeks, but they could in 2015 if there is continued weakness this month and through January.
The Fed will also hold a two-day meeting starting on Tuesday, so there could be some added fireworks. We haven’t heard from Janet Yellen in an FOMC minute, and her comments will need to be crafted in a way that Wall Street can handle.
The odds favor the bulls this week, and it is important to trust our game plan. I reminded myself that last week would provide great entry prices for future trades but that the bears still needed to be respected. Friday’s final hour meltdown was either a bonus package or the start of what could be a major trend change.
The portfolio is in great shape to add new trades, so I could be busy with trade alerts this week and possibly as soon as today. I still need to confirm that the lows are in, but it may be time to pick some low-hanging fruit.
My boots-on-the-ground research showed that all major stores, restaurants, malls and movies theaters in my town were packed throughout the weekend. I did some early Christmas shopping for friends and family and was not surprised by the bustling activity. However, my real shopping list was made last week when stocks and options went on sale. I still have to be careful of a bearish stampede to start the week, but, once the chaos settles, expect to be alerted of new trades.
I’m normally not this long-winded, but I know we have new subscribers, and a lot of traders want to know what the heck is going on. I have done my best to break down the headlines and the chart work for you so you can see how I trade, and I hoped it has helped.
Ahead of the open, futures look like this: Dow (+108); S&P 500 (+14); Nasdaq 100 (+33).
Momentum Options Play List
Closed Momentum Options Trades for 2014: 97-59 (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.
Marvell Technology (MRVL, $14.19, down $0.21)
MRVL January 15 calls (MRVL150117C00015000, $0.30, down $0.03)
Entry Price: $0.35 (12/11/2014)
Exit Target: $0.70
Stop Target: None
MRVL February 15 calls (MRVL150220C00015000, $0.50, down $0.05)
Entry Price: $0.55 (12/11/2014)
Exit Target: $1.10
Stop Target: None
Action: Support is at $14 on the break below the 200-day moving average and $14.25 on Friday. Resistance is at $14.75-$15 if the bulls can recover this level. The January options have 32 days before expiration, and the February options have 66 days before they expire.
Pfizer (PFE, $30.95, down $0.70)
PFE February 33 calls (PFE150220C00033000, $0.35, down $0.10)
Entry Price: $0.57 (12/8/2014)
Exit Target: $1.15
Stop Target: None
PFE March 33 calls (PFE150320C00033000, $0.50, down $0.15)
Entry Price: $0.68 (12/8/2014)
Exit Target: $1.40
Stop Target: None
Action: Support at $31.50 has been breached, which opens the door for a backtest to $30. A close above $32 should lead to a continued breakout to $33-$35. The 52-week high is at $32.96.
The March options have 94 days before they expire.
iShares Russell 2000 (IWM, $114.71, down $1.41)
IWM January 121 calls (IWM150117C00121000, $0.45, down $0.25)
Entry Price: $0.90 (12/5/2014)
Exit Target: $1.80
Stop Target: None
Action: Support at $115 failed to hold on Friday. There is now risk to $114-$113.50. Resistance is at $115, followed by $117.50-$118 if cleared.
PowerShares QQQ (QQQ, $102.67, down $1.13)
QQQ January 107 calls (QQQ150117C00107000, $0.50, down $0.20)
Entry Price: $0.98 (12/5/2014)
Exit Target: $2.00
Stop Target: None
Action: Support is at $102.50. There is additional risk to the 50-day moving average or $100 if stretched. Short-term resistance is at $103.50-$105. I have talked about the QQQs making a run to $110 on continued closes above $105, and the recent 52-week high is north of $106.
JDS Uniphase (JDSU, $13.81, up $0.06)
JDSU March 14 calls (JDSU150320C00014000, $1.05, up $0.05)
Entry Price: $0.70 (12/3/2014)
Exit Target: $1.40
Stop Target: $0.80 (Stop Limit)
Action: Support is at $13.50-$13.25. Resistance is at $14, and a close above this level would be bullish. The 52-week high is at $14.99.
You can read my full update on JDSU in the Dec. 3 Alert.
Flextronics (FLEX, $10.62, down $0.23)
FLEX January 11 calls (FLEX150117C00011000, $0.25, down $0.05)
Entry Price: $0.68 (9/5/2014)
Exit Target: $1.25
Stop Target: None
Action: I would like to see $10.50 hold on a continued pullback. If not, I may be forced out of the position. A close above $11 would get the calls back “in the money,” and the breakeven point for the trade is at $10.68, by mid-January.
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.
Fortinet December 29 calls (from September 2014) — Continue to hold. You can read more about my thoughts on FTNT in the Dec. 11 Pre-Market Update.
International Business Machines January 170 calls (from November) — Continue to hold.
Holiday Savings Event: The local stores have their holiday decorations up and I’m beginning to think about gifts, so today I wanted to invite you to join me for a special Holiday Savings Event that I’m throwing for a limited time only. Renew your Momentum Options service today and save $200. It doesn’t matter when your subscription expires because I’ll just extend your current membership. Click here now to take advantage of this savings opportunity!
Editor and Chief Options Strategist