In This Issue:
Dear Momentum Options 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 Options Play List
Closed Momentum Options Trades for 2015: 46-14-1 (75%). 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.
Limelight Networks (LLNW, $4.07, up $0.37)
LLNW September 4 calls (LLNW150918C00004000, $0.60, up $0.10)
Entry Price: $0.35 (4/29/2015)
Exit Target: $0.70 (Limit Order on half)
Stop Target: None
Action: LLNW traded up to $4.10 and a fresh 52-week peak on Friday. Shares held $4 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 that a near-term run to $4.50-$5 could be coming on continued momentum.
You can read my full update on LLNW in the May 1 Pre-Market Update.
Krispy Kreme Doughnuts (KKD, $18.06, up $0.26)
KKD June 17 puts (KKD150619P00017000, $0.65, down $0.05)
Entry Price: $0.35 (4/28/2015)
Exit Target: $1.05 (closed first half at $0.70 on 4/29/2015)
Stop Target: $0.50 (Stop Limit)
Action: Shares tested resistance at $18.25 following Friday’s pop to $18.29. The calls traded to a low of $0.55, and our Stop Limit will likely trip on another run past $18.25. Support is at $17.75-$17.50 on another drop below $18.
Earnings are due out the first week of June, and I have a target of $15 for KKD going into or after the announcement.
You can read my full update on KKD in the April 29 Pre-Market Update.
Opko Health (OPK, $14.03, up $0.27)
OPK June 16 calls (OPK150619C00016000, $0.35, up $0.04)
Entry Price: $0.50 (4/27/2015)
Exit Target: $1.00
Stop Target: None
Action: Shares cleared and held $14 into Friday’s close after reaching a peak of $14.06. Resistance is at $14.25-$14.50 and the 50-day moving average. Support is at $13.50, but there is risk to $13-$12.75 and the 100-day moving average on a close below this level.
Earnings are estimated to be released on Friday, May 8. Analysts are looking for a loss of $0.08 a share on revenue of $23 million. I believe OPK will top these numbers.
Dot Hill Systems (HILL, $6.61, up $0.33)
HILL September 7.50 calls (HILL150918C00007500, $0.55, up $0.10)
Entry Price: $0.45 (4/20/2015)
Exit Target: $1.35-$1.80
Stop Target: None
Action: Resistance is at $6.50-$6.75 and the 52-week high. Near-term support is at $6.25.
Earnings are estimated to be released on Thursday, May 7. Wall Street is expecting a profit of $0.06 a share on revenue north of $59 million. The company has beaten or matched estimates the past four quarters, and another upside surprise could have shares pushing $7. There is risk back to $6 on an earnings miss or lowered guidance.
Trades on Hold — other 2015 Portfolio Open positions (3): 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.
SunPower (SPWR) June 38 calls (from April 2015) — I will likely close this trade if support at $30 fails. Resistance is at $32.50 — Continue to hold.
iShares Russell 2000 (IWM) May 127 calls (from April 2015) — I would like to be out of this trade by this Friday, win, lose or draw — Continue to hold.
BlackBerry (BBRY) June 13 calls (from March 2015) — This is a speculation trade from early March on BBRY receiving a takeover offer of $14 or better by mid-June — Continue to hold.
Editor and Chief Options Strategist
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