In This Issue:

Dear Momentum Stocks Weekly 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.

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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 10-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.

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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.

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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.

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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.

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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 Issue, 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 Issue 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.

TRAN52915

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.

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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 Stocks Weekly Play List

All prices given in this update are current as of May 29, 2015. I hereby disclose that I will be participating in the following trade(s).

The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 16-0, for a 100% win rate (129-17, or 88% win rate, overall since the start of 2011).

View the entire list of open and closed trades by clicking here.

 

Dot Hill Systems (HILL, $7.04, down $0.06)

Original Entry Price:  $7.10 (5/21/15)

Lowered Price from Selling Options:  N/A

Exit Target:  $14.00-$15.00

Return:  -1%

Stop Target:  Lower from $10.00 to $5.00.

Action:  Support is at $7.00 with $6.75 serving as backup.  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 write-up on HILL in the May 26 Issue.

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Flextronics (FLEX, $12.15, down $0.06)

Original Entry Price:  $12.55 (5/19/15)

Lowered Price from Selling Options:  N/A

Exit Target:  $15+

Return:  -3%

Stop Target:  $10.00

Action:  Shares tested a low of $12.07 last week.  Near-term support at $12.00 and the 100-day moving average held.  There is risk to $11.40-$11.30 and the 200-day moving average on a close below $11.80-$11.75.  Resistance is at $12.25-$12.50 and 50-day moving average.  A close above the latter should get 52-week highs north of $12.86 in play.

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Psychemedics (PMD, $14.37, up $0.11)

Original Entry Price:  $15.67 (5/5/15)

Lowered Price from Selling Options and dividends:  No options available

Exit Target:  $18.00-$20.00

Return:  -8%

Stop Target:  $12.00

Action:  Multi-month support at $14.00 was tested last week following continued closes below $14.75 and the 200-day moving average.  There is additional risk to $13.75-$13.50 on dips below $14.00.  Resistance is at $14.75-$15.00.

The stock currently yields 4.2% and pays a 60-cent annual dividend.  Psychemedics provides drug testing services for companies and organizations through the analysis of hair samples.  It is a more accurate way of detecting abuse for illegal drugs and helps companies manage these types of issues.

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Wells Fargo (WFC, $55.96, down $0.25)

WFC October 60 calls (WFC151016C00060000, $0.60, down $0.05)

Entry Price:  $0.67 (5/5/2015)

Exit Target:  $1.35

Return:  -10%

Stop Target:  None

Action:  WFC’s near-term support is at $55.50 followed by $55.00 and the 50-day moving average.  Resistance is at $56.00-$56.50.  The 52-week high is at $56.70.  A move above $57.00 likely gets $60.00 in the mix within the next few months.

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Limelight Networks (LLNW, $4.37, down $0.02)

Original Entry Price:  $3.91 (3/18/15)

Lowered Price from Selling Options:  N/A

Exit Target:  $7.00

Return:  12%

Stop Target:  Raise from $4.00 to $4.10 (Stop Limit).

Action:  Raise the Stop Limit from $4 to $4.10.  Last week’s low was $4.12.

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-$5.00.  Support has moved up to $4.25 with $4.00 serving as backup.
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Discovery Laboratories (DSCO, $0.84, up $0.03)

Original Entry Price:  $1.68 (3/5/15)

Lowered Price from Selling Options:  N/A

Exit Target:  $3.00

Return:  -50%

Stop Target:  $0.50

Action:  Shares held 80 cents throughout last week and are trying to build a base at this level.  Resistance is at $1.00.

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Bank of America (BAC, $16.50, down $0.17)

Original Entry Price:  $17.63 (12/19/14)

Lowered Price from selling options and dividends:  $17.28

Exit Target:  $20+

Return:  -5%

Stop Target:  $15.00

Current Dividend Yield: 1.3%

Action:  I have been wanting to write another covered call against our BAC shares, but the premiums haven’t been enough in the near-term options to lower the cost basis to under $17.00.  Until this level is cleared, it makes more sense for us to wait before capping the upside on the trade.

Resistance is at $16.75-$17.00.  A close above the latter would be super bullish.  Support is at $16.50 followed by $16.25 and the 200-day moving average.  A close below these levels could lead to a test to $16.00 and the 50/100-day moving averages.

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.

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Rave Restaurant Group (RAVE, $13.03, up $0.02)

Original Entry Price:  $8 (8/13/14)

Lowered Price from Selling Options:  No options available

Exit Target:  $20.00

Return:  63%

Stop Target:  $12.60 (Stop Limit)

Action:  Shares of RAVE have been in a downtrend since the company announced earnings a few weeks ago.  The company posted a loss of five cents a share which matched Wall Street’s expectations but revenue fell short at $11.91 million versus $11.95 million.

While some growing pains can be expected when building out a young franchise, the recent pullback has created a tremendous buying opportunity if current support holds.  However, further weakness and another 15% pullback could be ahead if there is additional selling pressure.

On a technical basis, shares are challenging their 100-day moving average and are currently holding $13.00.  The 100-day MA has held throughout 2015.  A close below $12.75 could lead to a nasty pullback to $10.00 and the 200-day moving average.  I hope this isn’t the case but I’m preparing for the worst while looking for the best in the stock.

Last Thursday’s low reached $13.01 and Friday’s bottom touched $12.97.

I don’t believe shares will trade down to $10.00 as there are clusters of support at $12.50, $12.00 and $11.50.  Continued closes above $13.00 would be bullish if shares can build a new floor of support which has held since the mid-March breakout.

I will talk more about RAVE in the coming weeks but wanted to provide a quick update on the company and stock.

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Huttig Building Products (HBP, $3.41, up $0.13)

Original Entry Price:  $4 (8/13/14)

Lowered Price from Selling Options:  No options available

Exit Target:  $6+

Return:  -15%

Stop Target:  $2.00 (Stop Limit)

Action:  Shares recovered prior support at $3.40 and the 200-day moving average with Friday’s 4% pop.  Support is at $3.30-$3.25 and the 50/100-day moving averages.  Resistance is at $3.50-$3.60.

The company recently reported better-than-expected earnings.  New subscribers can start adding shares at current levels while current subscribers should consider adding to their positions to lower the cost basis.

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Rambus (RMBS, $15.29, up $0.37)

Original Entry Price:  $17.83 (11/14/2011)

Lowered Price from Selling Options:  $16.38

Exit Target:  $15+

Return:  -7%

Stop Target:  $9.00

Action:  I mentioned new subscribers should have felt comfortable opening positions last week.  Longer-term subscribers may know I have stuck this trade out due to the company’s intellectual properties.  Rambus is also building some powerful partnerships and I still like the company’s prospects going forward.

Shares traded to a 52-week peak of $15.48 last week.  Friday’s high touched $15.41.  Multi-year resistance is at $15.75-$16.00.  A close above the latter could lead to a run at $17.00-$18.00.  Near-term support is at $14.50 followed by $14.00-$13.75 and the 50-day moving average.

I could open a covered call against the position to lower the cost basis of the trade.  The RMBS July 17 calls are trading for 20 cents and, if I take action, I will send out a Trade Alert.

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.

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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. Continue to hold.

DryShips (DRYS, January 2011) – We sold to open (wrote) the DRYS September 1 calls (DRYS150918C00001000) on 4/30/2015 for 5 cents. Continue to hold.

Bebe Stores (BEBE, February 2012) – We sold to open (wrote) the BEBE September 4 calls (BEBE150918C00004000) on 4/30/2015 for 35 cents. Continue to hold.

Vivus (VVUS, July 2012) – We sold to open (wrote) the VVUS September 4 calls (VVUS150918C00004000) on 4/30/2015 for 10 cents. Continue to hold.

Zynga (ZNGA, March 2014) – We sold to open (wrote) the ZNGA September 3 calls (ZNGA150918C00003000) on 4/30/2015 for 16 cents. Continue to hold.

Galena Biopharma (GALE, February 2014) – We sold to open (wrote) the GALE October 2 calls (GALE151016C00002000) on 4/30/2015 for 15 cents. Continue to hold.

Trade on!

Signed

Rick Rouse
Editor
Momentum Stocks Weekly