In This Issue:
Dear Momentum Options Subscriber,
May turned out differently than what most of Wall Street had planned for, as the market finished the month higher overall. Despite the recent choppiness, the bulls are holding the top of the four-month trading ranges and are still gunning for historic all-time highs.
The Dow declined 115 points, or 0.6%, to finish at 18,010 on Friday. The blue-chips traded down to 17,967 mid-day and tested support at 18,000-17,900. The close above 18,000 was slightly bullish, but the failure to hold the 50-day moving average was bearish. A move below 17,900 and the 100-day moving average could lead to 17,600 this week. Resistance is at 18,100-18,200, with a run to 18,350-18,500 and all-time highs possible on a close above the latter.
The S&P 500 fell 13 points, or 0.6%, to end at 2,107. The index tested a low of 2,104 ahead of Wall Street’s lunch break on Friday, with support at 2,100 and the 50-day moving average easily holding. There is risk to 2,080-2,075 and the 100-day moving average on a close below 2,090. Near-term resistance is at 2,125. A move above this level could get 2,135-2,150 and fresh all-time highs back in play.
The Nasdaq lost 28 points, or 0.6%, to settle at 5,070. Tech tested resistance at 5,100 on Friday’s open, but the 2-point positive pop to 5,099 quickly faded. The bears pushed a low of 5,057, with support at 5,050 holding. This level has held for nine of the past 11 sessions. Backup support is at 5,000 and the 50-day moving average. Resistance is at 5,100-5,125. A close above the latter could get 5,200-5,250 and historic highs in play.
The Russell 2000 dropped a 6-pack, or 0.5%, to close at 1,247. The small-caps opened above 1,250 at 1,251 before sinking 1% to 1,241. Support at 1,240 held, but the close below 1,250 and the 50-day moving average was a bummer. There is additional help at 1,230-1,225 and the 100-day moving average. Resistance has been strong at 1,260 since mid-May. A close above this level should get the short-sellers covering, which could carry it to 1,270-1,275 and all-time highs.
The S&P 500 Volatility Index ($VIX, 13.84, up 0.53) closed back above the 13.50 level after trading to a high of 14.43. The bulls have held the 15 level for 15-straight sessions, and there is stretch to 17.50 before I would become slightly bearish on the market. The bulls need to get the VIX back below 13.50-12.50 this week to keep higher market highs in play.
The Dow gained 170 points, or 1%, in May, while the S&P 500 added nearly 22 points, or 1.1%. The Nasdaq advanced 128 points, or 2.6%, and the Russell 2000 climbed 26 points, or 2.2%.
For 2015, the Dow is up 187.61 points, or 1.05%, and the S&P 500 is higher by 48.49 points, or 2.36%. Meanwhile, the Nasdaq has zoomed 333.97 points, or 7.05%, year to date, and the Russell 2000 has added 41.84 points, or 3.47%.
When you look at the year-to-date numbers, Wall Street would be disappointed if the Dow and S&P 500 finished the year with less than 5% gains. This assumes the indices perform like they have over the next seven months. The Nasdaq and Russell 2000 are on pace to gain 8%-15% this year if their performance continues. The suits-and-ties say Tech and the small-caps are overvalued, but these types of gains of gains would make them happy.
Some of the talking heads have finally picked up on the four-month trading range, but let’s put this in perspective as well. While the Dow may be in one of its tightest trading ranges in over 100 years, the other indices aren’t.
The Dow’s high-to-low range this year has been less than 7%. There have been three other times the range has been less than this, and they resulted in overall year-end gains for the index. Two of the occurrences ended with double-digit yearly gains for the blue-chips.
I recently covered these ranges in detail in the May 18 Pre-Market Update, and the trading ranges are as follows:
- Dow: 17,600-18,200
- S&P: 2,040-2,120
- Nasdaq: 4,800-5,000
- Russell: 1,200-1,260
I have talked about the indices trying to build a floor of support above these trading ranges and, to an extent, May accomplished this mission. The Nasdaq clearly led the charge higher last month and this year, which isn’t too surprising. The other major indices are near the tops of their ranges.
I have been saying since 2014 that the Nasdaq hasn’t come this far to not take out its all-time high of 5,134. This year’s high has been 5,119. My 10-year chart work from the Feb. 23 Pre-Market Update showed that the Nasdaq could trade up to 6,000. Here were some of my thoughts:
“The Nasdaq is the more interesting story, and I said throughout 2014 that the bulls haven’t come this far not to test 5,000 and all-time highs. As expected, I said that talk about this level would heat up last week, and it did. While talk of a bubble continues, I wouldn’t be surprised to see the Nasdaq make a run at 6,000 this year or into 2016. The index added 13% in 2014 and came into this year at 4,736. A run to 5,750 would represent a gain of 21%. If 6,000 triggers, the return would be 27%.”
My year-end price targets for the indices also assume that the 200-day moving averages hold across the board and, so far, they have.
The Monday/Friday closes have stayed slightly bullish as well, which is another reason I have stayed the course. Although the U.S. market was closed last Monday for Memorial Day, the Dow has closed higher in nine of the past 12 Monday sessions.
Fridays have turned sour, as the blue-chips have fallen for two in a row. Overall, the Dow has traded higher in seven out of 10 Friday sessions, but this week will be more meaningful. Higher Monday/Friday closes this week would be bullish, while lower finishes might be a warning sign that money is moving out of the market.
I talked about the divergence between the Dow Industrials and the Transports in detail, and this disconnect continued last week. The Dow Jones Transportation Average ($TRAN) is approaching its October 2014 lows after testing 8,265 on Friday. The one-year chart below shows support at 8,000, with a chance that 7,700 could trigger.
I also mentioned that the Dow has been able to push fresh all-time highs despite the disparity. More importantly, notice the rebound from the “double bottom” at 7,700 in mid-October to 9,310 by the start of December. It is also important to note that the Dow moved from 17,042 to 17,390 during the month of October, while the Transports tanked.
This is why I didn’t want you to panic this time around, as I said it was possible for the Dow to push all-highs despite another Transports sector debacle. I would love to see the same type of six-week rally that followed the aforementioned breakdown once the bleeding does stop.
On a cautious note, the financial sector stalled, which is an area I would like to see resume strength this week. The Financial Select SPDR (XLF, $24.60, down $0.22) traded to its lowest level since mid-May following Friday’s test to $24.54. There is wiggle room to $24.40 and the 50-day moving average, but a close below these levels would be bearish. Resistance is at $24.80-$25.
The first trading days of each month this year have been volatile and, with it being a Monday, it would be nice to see the bulls get off to a good start. June has been a weak month for the market during the past decade, and I have listed downside targets to watch for on a pending breakdown. While another backtest to support and a drop back into the trading ranges is possible, I have talked about a continued rally into June, and possibly July, depending on the VIX and other factors.
There will be a number of headlines this week that could sway market direction. The most important will be Greece’s debt issues and the nonfarm payrolls report on Friday.
From desk to press, futures look like this: Dow (+91); S&P 500 (+9); Nasdaq 100 (+26).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 55-18-1 (74%). 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.
I hereby disclose that I will be participating in the following trade(s). 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.
Rambus (RMBS, $15.29, up $0.37)
RMBS July 15 calls (RMBS150717C00015000, $0.95, up $0.25)
Entry Price: $0.50 (5/27/2015)
Exit Target: $1.00, raise to $1.30 (Limit Order on half)
Stop Target: $0.55, raise to $0.65 (Stop Limit)
RMBS August 16 calls (RMBS150821C00016000, $0.75, up $0.15)
Entry Price: $0.43 (5/27/2015)
Exit Target: $0.90
Stop Target: $0.45, raise to $0.55 (Stop Limit)
Action: Raise the Limit Order from $1.00 to $1.30 on the first half of the RMBS July 15 calls. Also, raise the Stop Limit from $0.55 to $0.65 on the RMBS July 15 calls.
Raise the Stop Limit from $0.45 to $0.55 on the RMBS August 16 calls.
Shares traded to a 52-week peak of $15.48 last week. Friday’s late-day high touched $15.41. Multi-year resistance is at $15.75-$16. A close above the latter could lead to a run at $17-$18. Near-term support is at $14.50, followed by $14-$13.75 and the 50-day moving average.
Dot Hill Systems (HILL, $7.04, down $0.06)
HILL September 7.50 calls (HILL150918C00007500, $0.65, flat)
Entry Price: $0.55 (5/21/2015)
Exit Target: $1.10
Stop Target: $0.57 (Stop Limit)
HILL December 7.50 calls (HILL151218C00007500, $0.95, flat)
Entry Price: $0.80 (5/21/2015)
Exit Target: $1.60
Stop Target: $0.85 (Stop Limit)
Action: Support is at $7, with $6.75 serving as backup. A close below $6.75 will likely trigger the Stop Limits. Resistance is at $7.20-$7.25. The recent 52-week high of $7.20 was tested last Thursday, and Friday’s peak reached $7.14.
You can read my full update on HILL and check out its 15-year chart in the May 22 Pre-Market Update.
iShares Russell 2000 (IWM, $123.89, down $0.75)
IWM June 128 calls (IWM150619C00128000, $0.22, down $0.16)
Entry Price: $0.70 (5/19/2015)
Exit Target: $1.05 (Limit Order on first half), $1.40 (Limit Order on second half)
Stop Target: None
Action: Short-term support is at $123 and the 50-day moving average, followed by $122 and the 100-day moving average. Resistance is at $125-$125.50. I would like to be out of this trade by next Friday’s close, if not sooner, as these options expire in less than three weeks.
Limelight Networks (LLNW, $4.37, down $0.02)
LLNW September 4 calls (LLNW150918C00004000, $0.70, flat)
Entry Price: $0.35 (4/29/2015)
Exit Target: $1.00 (Limit Order on half)
Stop Target: $0.45 (Stop Limit)
Action: Shares traded to a fresh 52-week high of $4.43 last week. A move above resistance at $4.50 could lead to a run to $4.75-$5. If shares reach $5, these options will be $1.00 “in the money.” Support has moved up to $4.25, with $4 serving backup.
Trades on Hold — other 2015 Portfolio Open positions (1): 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.
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. These options will carry some premium through the first week of June. I would like to be out of this trade by next Friday’s close. This gives the trade until June 10 for Blackberry to get a takeover offer — Continue to hold.
Editor and Chief Options Strategist