In This Issue:
Dear Momentum Stocks Weekly Subscriber,
The bears got the last Monday win, as all of the major indices closed lower to start the week. The small-caps led the way and gave the first clue that a rocky week would be forthcoming. The VIX held 13.50 on Monday but bubbled higher on Tuesday despite another blowout quarter by Apple (AAPL). Shares ran to an intraday all-time high of $134.54 but finished the session lower by $2.
Perhaps this was another warning sign, as Wednesday’s session was tepid, with Wall Street awaiting the Federal Open Market Committee’s (FOMC) latest meeting minutes. The Fed’s optimism for a booming economy this year faded, as it remained cautious on inflation risks. The market held support, but the action in the small-caps was once again concerning.
Thursday’s test to the major moving averages had the talking heads calling for a market selloff. Those comments fell on deaf ears, as the bulls recovered most of the losses on Friday to keep the three-month trading ranges intact.
The Dow jumped 183 points, or 1%, to end at 18,024 on Friday. The blue-chips traded in positive territory throughout the session and went out four points off of their high. The bulls cleared resistance at 17,900-18,000 and the 50-day moving average. Additional hurdles are at 18,100-18,200 and the top of the trading range. Continued closes above these levels keep 18,300-18,500 and all-time highs in play. Support is at 17,800 and the 100-day moving average on dips below 18,000-17,975, with backup support at 17,600.
The S&P 500 surged 22 points, or 1.1%, to settle at 2,108. The index tested and cleared resistance at 2,090-2,100 and the 50-day moving average while closing at its session high. Additional resistance is at 2,115-2,125 and the top of the trading range. A close above the all-time high north of 2,125 keeps 2,150-2,175 in the mix. Support is at 2,100, with risk to 2,075-2,070 on a close below 2,090. The 100-day moving average is at 2,068.
The Nasdaq zoomed 64 points, or 1.3%, to close at 5,005. The tech index opened above the 4,950 level and tested resistance at 4,975-5,000 throughout Friday’s action. The close back above 5,000 was bullish and sets the stage for another run at 5,050-5,100. The 52-week high is at 5,119 and the all-time high intraday high remains at 5,132. Another close below 4,950 and the 50-day moving average would be bearish.
The Russell 2000 rallied 8 points, or 0.7%, to finish at 1,228. The small-caps traded to a high of 1,229 on the open before fading into negative territory and testing 1,218 mid-day. Support at 1,215-1,210 and the 100-day moving average held. A close below the latter could lead to 1,200-1,180 and a test to the 200-day moving average. Resistance is at 1,230-1,235, but the bulls won’t be out of the woods until they clear 1,240-1,250 again.
The S&P 500 Volatility Index ($VIX, 12.70, down 1.85) tanked 12% after testing a low of 12.68. The VIX opened below 14 and held the 15 level following Thursday’s run to 15.29. Despite the late-week drama, the VIX closed below 15 for the 21st-straight session, which is a level the bears last held on April 1. I have repeatedly said not to flinch or get nervous until the VIX closes above 17.50. I have also said not to get too giddy or bullish on the market until the VIX gets below 12.50-11.50. A close below the latter should get single-digits in play.
The VIX continues to be one of the best tools for predicting short-term market direction, which is why I pay close attention to it. The slick-talking pros say the VIX is broken, and they only worry about it when it’s above 20 or when the low teens come into play. Don’t be surprised if you hear, “When the VIX is low, it’s time to go,” chants in the coming weeks.
The bulls did well in April, although the bears did get a piece of the market pie. The Dow gained 64 points, or 0.4%, while the S&P advanced 17 points, or 0.9%. The Nasdaq added over 40 points, or 0.9%, but the Russell fell 32 points, or 2.6%. Overall, the indices have all posted two wins and two losses during the first four months of 2015.
For the Dow, there have been four intraday and four closing all-time highs, while the S&P 500 has posted nine intraday and six closing all-time highs. For the Nasdaq, there have been 16 intraday and 14 52-week highs and, for the Russell 2000, there have been 15 intraday and 13 closing all-time highs.
The Monday/Friday closes have turned mixed in recent weeks and have been confirming the three-month trading range. The bears have won two of the past three Monday sessions and have split three of the past six.
The bulls have won two-straight Fridays and five of the past six.
For new subscribers, positive Monday/Friday closes usually signal that money is moving into the market. Mixed Monday/Friday closes can signal trading ranges, while down finishes can be clues that cash is moving out of the market.
The Dow Jones Transportation Average ($TRAN, 8,737, up 144) gave Wall Street a scare following back-to-back elevator drops before Friday’s rebound. The transports tested the April lows and near-term support at 8,550 last week before rebounding nearly 2% on Friday. The close back above the 200-day moving average was slightly bullish, but the 50- and 100-day moving averages are curling lower. A close below 8,500 could be the straw that breaks the transports’ backs. A recovery of the 8,800 level would be a small victory, but the index needs to clear 8,875-8,900 to regain momentum.
The Financial Select SPDR (XLF, $24.28, down $0.04) has been in a trading range of its own, as the battle between $24-$24.50 has lasted for over a month. The financials closed just below their 50-day moving average on Friday, with the 100-day moving average getting stretched throughout April. Consecutive closes above $24.50-$24.60 could lead to a breakout. Multiple closes below $24-$23.80 could lead to a breakdown.
Copper ($COPPER, $2.94, up $0.06) has made an amazing recovery following the April backtest to $2.65. The chart below shows the metal recovering off of the 200-day moving average. Higher copper prices are usually a bullish sign for the economy. Copper fell below $3 last November for the first time since 2010, and a recovery of this level seems certain on continued strength.
While semiconductors seem to have become the “new” model used to measure the health of the economy, they have been punished in recent weeks. The rotation out of semiconductor stocks seems to have found its way into the copper stocks, with Freeport-McMoRan (FCX, $23.66, up $0.39) leading the surge higher.
Shares formed a floor at $20 late last month and made a strong run at $24 last week. As you can see, shares are still more than $2 away from their 200-day moving average and could rally another 8%-10% from current levels. A close above $24 should be the trigger point for a push past $26, and I could have a New Trade Alert on the move.
Meanwhile, gold ($GOLD, $1,177.20, down $6.30) is struggling, as the yellow metal has fallen below its 200-day moving average. Friday’s low reached $1,168, and gold looks destined to test the $1,150 level again over the near term. Resistance is at $1,190-$1,200, but I wouldn’t get bullish on gold until $1,225 and the 200-day moving average are cleared. With bond prices rising, gold could stay stagnant, and higher bond prices are also good for the financial stocks.
Silver ($SILVER, $16.12, up $0.01) is also below its 200-day moving average and appears to be headed for a test to $15.75-$15.50. I would love to see a drop to $14 again like we did in December, as it would represent another great buying opportunity. From time to time, I like to buy silver (and gold) coins, but you have to be careful of the “spot” prices dealers and brokers charge.
Social media stocks took it on the chin last week, as a number of companies disappointed Wall Street’s earnings expectations. The selloffs in Twitter (TWTR), Yelp (YELP) and LinkedIn (LNKD) have the talking heads calling for a “bubblicious” top in the sector, as they quickly forgot the decent results posted by Facebook (FB) and Google (GOOG).
Twitter was the worst disaster, however, as its earnings were released ahead of last Tuesday’s close. The company said that a third party that operates its website was responsible for the early leak, as shares were halted with roughly 30 minutes left in the session.
The company beat estimates by $0.03 a share after reporting a profit of $0.07 a share for the recently ended first quarter. However, it missed on revenue by $20 million and lowered its second-quarter forecast.
Shares reopened 10 minutes ahead of the close and were pushing $40, down over 20%, on the news. They traded to a low of $38.38 before closing north of $42. Friday’s low reached $37.37, and there is still risk to $36-$35 on continued weakness. Aggressive traders have said that they would nibble if shares held $40, but I would wait for $45 and the 100- and 200-day moving averages to clear before possibly going long.
While May has a reputation for being a bearish month, it has been bullish in recent years. During the past 16 years, May has been split, with the bulls and bears getting eight wins apiece. The “sell in May and go away” theme started gaining steam on Thursday’s pullback but settled down on Friday’s rebound.
Of course, the suits-and-ties called it a “dead-cat bounce,” but the market is still within a stone’s throw of clearing all-time highs.
The breakdown and sudden reversal in the small-caps is concerning, but the Russell 2000 is still up 2% year-to-date. The Nasdaq is pushing a 5% return, while the S&P 500 is higher by nearly 3%. The Dow is showing a gain of 1% for 2015 and held green for the year on Thursday’s low.
These are bullish signs, along with the VIX holding 15 for a month. The financial sector is still teetering, but it is looking more bullish than bearish, as some financial stocks are testing recent 52-week peaks. If the Russell 2000 can hold recent support levels, along with the transports, financials and the VIX, May could be a bullish month. I will be watching these four clues this week for market direction.
The portfolio is light at the moment, but I also want to be careful with new trades, as a continued trading range could develop for another few weeks. This isn’t my first rodeo, so there is also the chance lower lows could come into play.
I have done well navigating the three-month trading range and picking strong stocks with bullish momentum. I also thrive at shorting stocks and using put options to play weak stocks and downtrends in the market.
Predicting a market crash was a hot topic in 2014 and, while the crash never came, there are a number of slick-talking pros, politicians and other talking heads that have been doing the same thing this year. At some point, they will get their wish, but, with the major moving averages holding, I’m still not betting against the bulls until there is some major damage.
From desk to press, futures look like this: Dow (+64); S&P 500 (+5.5); Nasdaq 100 (+10).
Momentum Stocks Weekly Play List
All prices given in this update are current as of May 1, 2015
The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 12-0, for a 100% win rate (128-17, or 88% win rate, overall since the start of 2011).
Limelight Networks (LLNW, $4.07, up $0.37)
Original Entry Price: $3.91 (3/18/15)
Lowered Price from Selling Options: N/A
Exit Target: $7.00
Stop Target: $2.00
Action: The company beat Wall Street estimates by reporting a loss of 2 cents on revenue of $43 million. Limelight raised full-year guidance to $164-$170 million and ended the quarter with over $80 million in its cash coffers. The company has been buying back its stock and repurchased 300,000 shares for nearly $1 million in the recently ended first quarter.
Their CEO was upbeat as he said they are now entering a “growth” phase with the company’s content delivery network (CDN) getting bigger, faster, and stronger.
Limelight’s relationship with Netflix (NFLX) is where my interest lies most as I believe a marriage between the two is in the future. Netflix shelled out nearly $5 million last quarter to Limelight that equates to nearly $20 million a year at current levels.
Limelight has a market cap of $400 million and a takeover offer of $750-$800 million would be doable for Netflix and would have LLNW shares pushing $7.50-$8.00.
Akamai Technologies (AKAM) is the 800-pound gorilla in the CDN space and LLNW is a cheaper way to gain access to the sector. Limelight rejected a takeover offer north of $6.00 last summer and it’s where I believe shares are headed during the next three to six months.
LLNW traded up to $4.10 and a fresh 52-week peak on Friday. Shares held $4.00 into the close and the next wave of resistance is at $4.20-$4.25. Support is at $3.80-$3.75 on a pullback.
The five-year weekly chart is showing a near-term run to $4.50-$5.00 could be coming on continued momentum.
Discovery Laboratories (DSCO, $1.14, down $0.01)
Original Entry Price: $1.68 (3/5/15)
Lowered Price from Selling Options: N/A
Exit Target: $3.00
Stop Target: $0.50
Action: Support is at $1.10-$1.00, and a close below a buck would be bearish. Resistance is at $1.20-$1.25 followed by $1.35-$1.40 and the 50/100-day moving averages.
You can read my full update on DSCO and its earnings by clicking here.
Bank of America (BAC, $16.11, up $0.18)
Original Entry Price: $17.63 (12/19/14)
Lowered Price from selling options: $17.28
Exit Target: $20+
Stop Target: $15.00
Current Dividend Yield: 1.3%
Action: Shares cleared their 50-day moving average and resistance at $15.75 following last Wednesday’s surge to $16.04. The next waves of resistance are at $16.25 and the 100/200-day moving averages. Support is at $15.75 followed by $15.50-$15.25.
I could initiate a covered call on BAC this week to lower the cost basis of the trade. If I take action, I will send out a Trade Alert.
We previously sold to open (wrote) the BAC January 18 calls for 30 cents on Jan. 2, 2015, to reduce the cost basis to $17.33, and the calls expired for the full premium on Jan. 16, 2015.
Bank of America paid a 5-cent dividend on March 4. This lowered the cost basis of the trade to $17.28.
Rave Restaurant Group (RAVE, $13.98, flat)
Original Entry Price: $8 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $20.00
Stop Target: $12.60 (Stop Limit)
Action: Shares traded to a high of $15.66 to start the week before closing just below $15.00 to $14.96. This was a good signal that lower lows would come throughout the week with Friday’s bottom reaching $13.66. A close below $13.60-$13.50 could lead to a test to $13.00. Resistance is at $14.50-$15.00.
The company’s next earnings report is due out this month. For new subscribers, you can read my February earnings update on RAVE and why this stock is a multi-year hold.
Huttig Building Products (HBP, $3.89, up $0.28)
Original Entry Price: $4.00 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Stop Target: $2.00 (Stop Limit)
Action: I mentioned a back test to $3.50 and the 200-day moving average might come. Monday’s low reached $3.55 followed by Wednesday’s test to $3.53. Hopefully, this was a “double-bottom.”
A close above $4.00 would be bullish. April’s high reached $4.12. A close above these levels should get $4.25-$4.40 in play.
Rambus (RMBS, $14.16, up $0.32)
Original Entry Price: $17.83 (11/14/2011)
Lowered Price from Selling Options: $16.38
Exit Target: $15+
Stop Target: $9.00
Action: Shares recovered $14.00 to start the week and held this level on four out of five closes. Resistance is at $14.25-$15.00. Near-term support is at $13.50-$1.00 on closes below $14.00.
We previously sold to open (wrote) the RMBS December 20 calls for $1.45 on Nov. 14, 2011 to reduce the cost basis to $16.38.
Trades on Hold (6): These are trades that are still open in the portfolio but are down from the original recommended price. These trades are on “hold” and are not a buy until I bring back coverage of the stock. This means I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when a trade closes.
I do not recommend adding to these positions or opening new positions, but if you are already holding the stocks, we recently opened covered calls on these positions. If you missed the alert, you can find it here.
AKS Steel Holding (AKS, May 2011) – We sold to open (wrote) the AKS September 6 calls (AKS150918C00006000) on 4/30/2015 for 40 cents.
DryShips (DRYS, January 2011) – We sold to open (wrote) the DRYS September 1 calls (DRYS150918C00001000) on 4/30/2015 for 5 cents.
Bebe Stores (BEBE, February 2012) – We sold to open (wrote) the BEBE September 4 calls (BEBE150918C00004000) on 4/30/2015 for 35 cents.
Vivus (VVUS, July 2012) – We sold to open (wrote) the VVUS September 4 calls (VVUS150918C00004000) on 4/30/2015 for 10 cents.
Zynga (ZNGA, March 2014) – We sold to open (wrote) the ZNGA September 3 calls (ZNGA150918C00003000) on 4/30/2015 for 16 cents.
Galena Biopharma (GALE, February 2014) – We sold to open (wrote) the GALE October 2 calls (GALE151016C00002000) on 4/30/2015 for 15 cents.
Momentum Stocks Weekly
P.S. A Change to our Text Message Service
The number you receive our text alerts (SMS) has changed. The new number is 24587. You don’t need to do anything to continue getting our text messages if you have already signed up. But if you don’t start receiving text alerts from 24587 today, you may need to contact your carrier to ask them to unblock texts from the new number.
If you don’t already receive our text alerts, we encourage you to sign up here. It is free to register, though your carrier may impose charges. And, again, be sure to have your provider remove any blocks for our number, 24587.