Dear Momentum Options Subscriber,

The market was mixed on Tuesday, with bearish and bullish signs showing up throughout the session. Although Wall Street is saying that a selloff is looming, rational thinking and chart work show that the trading ranges from February are back in play.

The Dow dipped 2 points, or 0.01%, to close at 17,764. The blue-chips tested a low of 17,714 shortly after the open, with 17,600 and the 200-day moving average easily holding. The bulls managed to clear 17,800 but failed to hold that near-term resistance level following a trip to 17,817. There are additional hurdles at 17,900-18,000 and the 50- and 100-day moving averages.

The S&P 500 added a point, or 0.04%, to finish at 2,080. The index traded down to 2,072 on Tuesday’s open, and I talked about risk to 2,050 and the 200-moving average on a close below 2,070. The bounce off of the low reached a peak of 2,085, with resistance at 2,090-2,100 and the 50-day moving average holding.

The Nasdaq slipped 7 points, or 0.15%, to end at 5,013. Tech was weak throughout the first half of trading after bottoming at 4,974. The bulls held 4,975-4,950 and the 100-day moving average and were able to recover the 5,000 and the 50-day moving average ahead of the close. Resistance is at 5,025-5,050.

The Russell 2000 gave back 4 points, or 0.3%, to settle at 1,249. The small-caps fell to a low of 1,242 during the opening action, with support at 1,240 holding for the tenth-straight session. The close below 1,250 was slightly bearish, with short-term resistance remaining at 1,260.

The S&P 500 Volatility Index ($VIX, 14.47, down 0.82) traded up to 15.74 intraday but never threatened 17.50, which is the level I’m watching like a hawk. The close back below 15 and the session low was a victory for the bulls, but they still need to get under 13.50 this week.

I have updated the parameters of our latest trade in Rite Aid (RAD) and included a chart and some juicy tidbits on why I like the call options.

From desk to press, futures look like this: Dow (+50); S&P 500 (+7); Nasdaq 100 (+14).

Momentum Options Play List

Closed Momentum Options Trades for 2015: 59-19-1 (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 8:00 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.

 

Rite Aid (RAD, $8.45, up $0.12)

RAD July 8 calls (RAD150717C00008000, $0.75, up $0.10)

Entry Price: $0.65 (6/9/2015)

Exit Target: $1.30

Return: 15%

Stop Target: None

 

RAD October 9 calls (RAD151016C00009000, $0.60, up $0.05)

Entry Price: $0.55 (6/9/2015)

Exit Target: $1.10

Return: 8%

Stop Target: None

Action: Shares traded to a high of $8.47 on Tuesday following a backtest to near-term support at $8.25. The 50-day moving average is holding, and closes above $8.50-$8.75 would be bullish.

RAD1

The golden crosses that formed in January and March are also bullish signs that shares could push $9-$10 over the next few months.

The company has blasted Wall Street’s earnings expectations over the past three quarters by a $0.05, $0.05 and $0.07. In the year-ago quarter, Rite Aid matched analysts’ expectations.

Earnings in April came in at $0.12 a share on revenue of $6.85 billion versus a forecast for $0.07 a share on sales of $6.8 billion.

For 2016, the company said earnings would be between $0.19-$0.27 a share due to an income-tax expense. Analysts had expected $0.43 a share. The adjustment to earnings was $0.13-$0.18 a share, but, without the adjustment, earnings would have been $0.32-$0.45 a share.

The tax benefit was beneficial to fourth-quarter earnings, and the accounting change caused a pullback in the stock. Shares were pushing $9 ahead the earnings announcement and tested a low of $7.75 in late April.

The healthcare industry has also become a hot sector for mergers and acquisitions in 2015. Some of the recent action includes United Health Group’s (UNH) purchase of pharmacy-benefits manager Catamaran (CTRX) for $12.8 billion, or $61.50 per share. Pharmacy giant CVS (CVS) bought Omnicare (OCR) for $12.7 billion. Meanwhile, health-insurance giant Humana (HUM) said it would put itself up for sale.

It would not be surprising to see another healthcare company, like Johnson & Johnson (JNJ), make a bid for Rite Aid. Walmart (WMT) could also afford to make an offer and could benefit from the end roads RAD has made growing its brand awareness.

Express Scripts (ESRX) has a market cap of $63 billion and could also be in play this year as a takeover candidate. However, I like smaller rival Rite Aid, at $8 billion, as it seems like a better and more under-the-radar target.

I wanted to use the shorter-term, “in-the-money” RAD options to play a possible push past $9 by mid-July. I opened the October calls to play a possible run past double-digits in four months.

 

Wells Fargo (WFC, $56.70, up $0.58)

WFC July 60 calls (WFC150717C00060000, $0.21, up $0.04)

Entry Price: $0.20 (6/5/2015)

Exit Target: $0.50

Return: 5%

Stop Target: None

Action: Shares traded to a high of $56.92 on Tuesday to test resistance at $57. The recent 52-week high is at $57.22. Support is at $56-$55.50.

 

Rigel Pharmaceuticals (RIGL, $3.54, down $0.09)

September 5 calls (RIGL150918C00005000, $0.45, down $0.10)

Entry Price: $0.40 (6/4/2015)

Exit Target: $0.80

Return: 13%

Stop Target: None

Action: Yesterday’s low touched $3.46. Support is at $3.50, followed by $3.30-$3.25 and the 100-day moving average. Resistance is at $3.75, followed by $4 and the 50-day moving average.

You can read my detailed write-up on RIGL in the June 5 Pre-Market Update.

 

Sony (SNE, $29.14, down $0.13)

SNE July 33 calls (SNE150717C00033000, $0.15, down $0.05)

Entry Price: $0.45 (6/1/2015)

Exit Target: $0.90

Return: -67%

Stop Target: None

Action: Shares rebounded to hold $29 yesterday. Support is at $28 and the 100-day moving average. Resistance is at $30. I’m placing this trade on “hold,” and it will appear in the “Trades on Hold” section in subsequent updates, as there is no need for daily coverage of the trade until there is a rebound above $30. I will bring back coverage on a close above this level. If I take additional action before then, I will let you know.

 

Dot Hill Systems (HILL, $7.42, up $0.12)

HILL September 7.50 calls (HILL150918C00007500, $0.80, up $0.05)

Entry Price: $0.55 (5/21/2015)

Exit Target: $1.10

Return: 36%

Stop Target: $0.57 (Stop Limit)

 

HILL December 7.50 calls (HILL151218C00007500, $1.20, up $0.05)

Entry Price: $0.80 (5/21/2015)

Exit Target: $1.60

Return: 50%

Stop Target: $0.85 (Stop Limit)

Action: Shares traded to a low of $7.01 on Tuesday, but our Stop Limits held. Support for the common stock at $7 held as well. Even more impressive was the run to $7.48 shortly afterwards. Resistance is at $7.50-$7.75. Shares were at $7.51 in after-hours trading last night, which might be a good omen for today.

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, $124.44, down $0.38)

IWM June 128 calls (IWM150619C00128000, $0.15, down $0.11)

Entry Price: $0.70 (5/20/2015)

Exit Target: $0.90 (Limit Order)

Return: -79%

Stop Target: None

Action: Short-term support is at $124 and the 50-day moving average. Resistance is at $126-$127.

Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options