In This Issue:
Dear Momentum Stocks Weekly Subscriber,
The bulls got off to a good start last week, as the market edged higher to push resistance and fresh all-time highs. However, the small-caps acted weak, and trading was tight ahead of a busy week for earnings.
Although earnings so far have been impressive on some fronts, there were a number of revenue misses and weak guidance projections that caused momentum to slow. The bears pushed the first waves of support early in the week, with the majority of the damage attributed to blue-chip misses.
The bulls tried to show some momentum mid-week, but they stumbled at the resistance levels that had served as prior support. Tech stalled ahead of the weekend, along with biotech and the financial stocks. These developments helped the bears get the weekly win, and further trouble is likely on the horizon.
The Dow declined 163 points, or 0.9%, to close at 17,568 on Friday. The blue-chips showed a little pop on the open after reaching 17,756, but resistance at 17,800 and the 200-day moving average easily held. The fade below 17,600 was a bearish development, as it opens risk down to 17,400-17,350 over the near term.
The S&P 500 sank 22 points, or 1.1%, to finish at 2,079. The index tested a high of 2,106 on the open but struggled with resistance at 2,110-2,115. The late-day fade below 2,090 set the stage for a test to 2,075, with Friday’s low reaching 2,077, and I warned of a backtest to this level last week. The bears are within a stone’s throw of cracking 2,060 and the 200-day moving average.
The Nasdaq tanked 57 points, or 1.1%, to end at 5,088. Tech made a run to resistance at 5,175-5,200 at the start of trading, but the drop back below 5,150 soon afterwards was a warning sign. The bears pushed a low of 5,084, with the bulls holding the 50-day moving average. A close below 5,075 opens the flood gates for a flush to 5,000 and a test of the 100-day moving average.
The Russell 2000 dropped 19 points, or 1.5%, to settle a shade under 1,226. The small-caps traded in negative territory throughout the session, and the break below 1,240 was also a warning sign. I mentioned that if this level was violated last week a test to 1,225 could come quickly, and that level triggered on Friday. There is additional help at 1,210-1,200 and the 200-day moving average on continued weakness.
The S&P 500 Volatility Index ($VIX, 13.74, up 1.10) zoomed to a high of 14.73 and held 15 while closing above 13.50. This was a mixed signal, but it’s a situation that favors the bears coming into the week. A move back above 15 could get 17.50-20 back in play. A close below 12.50 might suggest that a rebound rally is in store.
International Business Machines (IBM, $159.75, down $1.98) was the pace car for the barrage of earnings and, despite a top-line beat of $0.04, IBM missed on revenue for the 14th time in 16 quarters. You would think that its current CEO would have noticed this trend ahead of such a crucial quarter and rallied the troops, but she didn’t. A memo to the sales team last month and a revenue beat might have saved the shares from sinking $10 to $163 last Tuesday, and below $160 by Friday’s close.
IBM’s results weighed on the Dow and the overall market, as Tuesday’s session was dominated by the bears and the backtest to the first levels of support. Apple (AAPL, $124.50, down $0.66) followed IBM’s lousy lead by beating expectations on both the top and bottom lines. However, in classic Apple style, the company lowered guidance and tempered Wall Street’s enthusiasm.
Apple shares tested their 200-day moving average for the second-time this month but held support following a low of $120. It is too early to say that a “double bottom” is in, but shares look attractive for possibly taking a “half-sized” position. However, I would suggest a tight stop at $119 given the recent volatility.
A look inside the numbers revealed that Apple sold fewer iPhones this quarter versus the previous quarter. Unit sales of the iPhone came in at 47.53 million for the quarter versus 61.17 million during the prior quarter.
Also disappointing was the drop in iPad sales, as units sold came in at just under 11 million for the quarter compared to over 12.6 million for the previous three months. A new iPad Pro model could debut later this year, so this trend could linger for another quarter or two.
The big worry for Wall Street was that Apple lowered guidance for the current quarter by $1 billion. I mentioned that the company likes to play the cat-and-mouse game with Wall Street, and this time around was no different. The company now has more than $200 million in its cash coffers, although much of it is overseas.
Amazon.com (AMZN, $529.42, up $47.24) surged 10% on Friday following earnings that topped expectations. The company reported a profit of $0.19 a share on revenue over $23 billion. Analysts were looking for a loss of $0.14 a share on revenue north of $22 billion.
The company said it also expects revenue for the current quarter to come in at $23.3-$25.5 billion versus estimates for $23.4 billion. Perhaps the bullish sales outlook was due to the huge success of Amazon’s Prime Day earlier this month, which exceeded Black Friday 2014 in terms of sales.
Gold tested a low of $1,080 an ounce to start the week, and the continued closes below $1,100 were very bearish developments. Friday’s low for gold reached $1,072. The near-term chart looks scary, with a test to $1,000 being nearly a given as long as $1,100 holds as resistance. At current levels, this would suggest another 10% pullback in the yellow metal. The major moving averages are curling lower and show no signs of leveling out over the near term.
The longer-term 10-year chart looks more terrifying, as gold could test $900-$800 on a break below $1,000.
I have been warning about the breakdown in gold all month and continue to monitor the SPDR Gold Trust ETF (GLD, $105.35, up $1.02). GLD traded to a fresh 52-week low of $103.43 on Friday and looks poised to test the low $90s on a continued pullback.
If GLD falls below $103.50 this week, I might target the GLD August 100 puts (GLD150821P00100000, $0.59, down $0.18) for a short-term trade. The GLD September 98 puts (GLD150918P00098000, $0.86, down $0.18) could also be used to buy more time. The aforementioned GLD chart shows risk to $106-$108 over the near term, so these options could get cheaper.
Silver tested a low of $14.33 an ounce on Friday and appears to be headed to $14 over the near term. The longer-term 10-year chart shows possible risk to $12.50-$10 if this level fails to hold.
This week’s calendar will be just as busy with earnings as last week, which was the height of second-quarter earnings season. Current earnings have been about the same as recent quarters, with roughly 70% of companies “beating” expectations. However, revenue numbers seem to be coming in lighter, and that is the true measure of sustainable profits.
Facebook’s (FB, $96.95, up $1.51) earnings following Wednesday’s close will be the most anticipated announcement of the week. The company is expected to earn $0.47 a share on revenue of $3.98 billion. Facebook has topped estimates in the past four quarters by $0.02, $0.05, $0.03, and $0.10, respectively.
In April, the $0.02 beat was accompanied by a revenue miss of $3.54 billion versus estimates for $3.56 billion. Shares fell from $84.63 to $82.41 the day after the announcement but tested a low of $76.79 into mid-May.
In January, the $0.05 beat came on better-than-expected revenue of $3.85 billion versus $3.77 billion. Shares rallied from $76 to $78 the following session but faded to $73.75 into early February.
There have been numerous “Buy” ratings and raised triple-digit price targets on Facebook during the past several weeks. Last Monday, one brokerage firm raised its price target from $80 to $117.
The prior week, another firm reiterated its “Buy” rating and a $108 price target on Facebook.
Morgan Stanley raised its price target to $110 and kept an “Overweight” rating on the stock.
And, finally, at the start of July, Facebook made Bank of America/Merrill’s “Top 10 Ideas for Q3,” while another Wall Street firm raised its price target to $100 from $92. Shares were pushing $87 coming into the month.
Facebook traded to an all-time high of $99.24 last week and is carrying high expectations coming into the announcement. While I do expect the company to beat on the top and bottom lines, I wouldn’t be surprised to see a miss on goodwill charges or other impairments either.
There are weekly and monthly options available to trade on Facebook. While the weekly options provide more bang for the buck, I mentioned earlier that shares tend to make a much larger move after the earnings announcement. For this reason, I looked at the August option chains for a possible trade.
Although analysts are extremely bullish on Facebook, it is possible that shares are setting up for a “sell-the-news” event given the run this month. The FB August 90 puts (FB150821P00090000, $2.40, down $0.20) look tempting, but they are expensive. The break-even point for these options is when FB shares are trading at $87.60, technically, by mid-August. This would require a 10% pullback in the stock from current levels, which is a risky bet, especially on an earnings beat.
The FB August 105 calls (FB150821C00105000, $2.55, up $0.72) were active on Friday, as nearly 7,000 contracts traded hands. These options have also become juiced, as the break-even point for this bullish trade is now at $107.55, technically, by mid-August. This would also require a double-digit percentage move in the stock to the upside for the trade to start making money.
The premium for both of the aforementioned call and put options would be a little more than $5.00 as a straddle option trade. This strategy is considered a “safer” way to play a possible large move in a stock, but it too is expensive. To break even, FB would need to be above $110 or below $85, technically, by mid-August. While this is possible, it’s not the best risk/reward setup.
There is no overhead resistance in the stock once $100 clears, so a run to $105-$110 could easily be reached on short-covering. However, an earnings miss or lowered guidance could have shares falling below $90 and testing $86 and the 50-day moving average.
The Monday/Friday Dow closes have been mixed in recent weeks, but they are showing weakness. The bulls and bears have split the past four Monday closes, but last week’s 14-point win was unimpressive. Overall, the Dow has closed lower on four of the past seven Mondays.
Friday Dow closes have also favored the bears, as they have won the last two sessions. Overall, the Dow has closed lower on seven of the past nine Fridays. A lower Monday/Friday close this week would suggest that August could be bearish.
I stayed aggressive on the run to fresh highs this month, but I have been warning that a trading range or possible pullback could develop afterwards. This doesn’t mean that higher highs aren’t in store this week or next month, but the technical indicators I follow are giving mixed-to-bearish signals at the moment.
The Dow is down 51 points for the month, while the S&P 500 is up nearly 17 points. The Nasdaq is higher by 102 points, or 2%, and the Russell 2000 is lower by 28 points, or 2%.
This week will decide whether the bulls or the bears win the month of July and, while a split appears to be in the cards, the bears could get a clean sweep on continued selling pressure. The bulls could also be setting up for a summer rally, but it will be on shaky ground without broader market participation.
From desk to press, futures look like this: Dow (-106); S&P 500 (-30); Nasdaq 100 (-10); Russell (-7).
Momentum Stocks Weekly Play List
All prices given in this update are current as of July 24, 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 25-0, for a 100% win rate (142-17, or 89% win rate, overall since the start of 2011)
View the entire list of open and closed trades by clicking here.
Limelight Networks (LLNW, $3.75, down $0.15)
Original Entry Price: $4.03 (7/9/2015)
Lowered Price from Selling Options: N/A
Exit Target: $5.00-$6.00
Return: -7%
Stop Target: $3.00
Action: I mentioned there was risk to $3.75-$3.60 on a close below $4-$3.90 and the 100-day moving average. Friday’s low touched $3.73. A close below $3.60-$3.50 would be a bearish development.
Resistance is at $4.15-$4.20 and the 50-day moving average. A close above these levels would be bullish.
I have a Price Target of $5-$6 during the next six to 12 months. Limelight Networks received a takeover offer north of $6 last summer. I’m expecting another takeover attempt at some point this year, or next, as the content delivery market (CDN) remains hot.
Rave Restaurant Group (RAVE, $12.69, down $0.08)
Original Entry Price: $13.92 (7/9/2015)
Lowered Price from Selling Options: N/A
Exit Target: $20.00
Return: -8%
Stop Target: $10.00
Action: Shares recovered $13 to start the week before fading to a low of $12.40 during Wednesday’s action. There is further risk to $12-$11.50 on another drop below $12.50. Resistance is at $13 and the 50-day moving average.
You can read my recent earnings update on RAVE and why it remains my No. 1 stock pick from the June 29 Issue.
Rigel Pharmaceuticals (RIGL, $2.94, down $0.08)
Original Entry Price: $3.51 (6/2/2015)
Lowered Price from Selling Options: N/A
Exit Target: $4.00-$5.00
Return: -16%
Stop Target: $2.00
Action: Support is at $2.90 and the 200-moving average. A close below this level could lead to a retest of $2.75-$2.70. Resistance is at $3.25 on continued closes back above $3. The weakness in the biotech sector could weigh on shares into August.
You can read my detailed write-up from the June 8 Issue here.
Dot Hill Systems (HILL, $6.04, down $0.21)
Original Entry Price: $7.10 (5/21/2015)
Lowered Price from Selling Options: N/A
Exit Target: $14.00-$15.00
Return: -15%
Stop Target: $5.00
Action: A close below $6-$5.75 could lead to a backtest to $5.50-$5.25 and the 200-day moving average. Resistance is at $6.25 and the 100-day moving average.
Earnings are due out Aug. 6. Wall Street is looking for a profit of $0.06 a share on revenue of $60.64 million. You can read my full write-up on HILL in the May 26 Issue.
Flex (formerly Flextronics) (FLEX, $10.75, down $0.14)
Original Entry Price: $12.55 (5/19/2015)
Lowered Price from Selling Options: N/A
Exit Target: $15.00+
Return: -14%
Stop Target: $10.00
Action: Flextronics International Ltd. officially changed its name to Flex on Friday.
There is additional risk to $10.50-$10 on continued drops below $10.75. Resistance is at $11 followed by $11.40-$11.50 and the 200-day moving average.
The company matched earnings expectations of $0.23 a share last week. However, revenue was shy at $5.57 billion versus expectations for $5.89 billion. Flex offered current quarter numbers of $0.22-$0.28 a share on revenue of $5.9-$6.5 billion. Wall Street has a forecast for $0.25 a share on revenue of $6.23 billion.
I still like the stock at current levels despite the sight revenue miss. Hopefully, the company’s numbers come in at the top end of their given range when Q2 earnings are announced in October.
Psychemedics (PMD, $12.20, up $0.40)
Original Entry Price: $15.67 (5/5/2015)
Lowered Price from Selling Options and dividends: No options available
Exit Target: $15.75 (Limit Order)
Return: -22%
Stop Target: $7.75 (Stop Limit)
Dividend Yield: 5.5%
Action: Shares rebounded 9% last Thursday to close at $11.80. Friday’s 3% move past $12 was encouraging but additional hurdles are at $12.50-$13. Support is at $11-$10.
Huttig Building Products (HBP, $3.23, flat)
Original Entry Price: $4 (8/13/2014)
Lowered Price from Selling Options: No options available
Exit Target: $6.00+
Return: -19%
Stop Target: $2.00 (Stop Limit)
Action: Resistance is at $3.20-$3.25 and the 50-,100- and 200-day moving averages. A move above the latter would be bullish. Support is at $3.10-$3.00.
Rambus (RMBS, $13.11, down $0.25)
Original Entry Price: $17.83 (11/14/2011)
Lowered Price from Selling Options: $16.38
Exit Target: $15.00+
Return: -20%
Stop Target: $9.00
Action: Support is at $13.00-$12.75. A close below the latter could lead to$12.50 and another retest of the 200-day moving average. Resistance is at $13.25-$13.50 followed by $13.75 and the 100-day moving average.
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 (7): 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.
Discovery Laboratories (DSCO, March 2015) — Continue to hold.
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!
Rick Rouse
Editor
Momentum Stocks Weekly
