In This Issue:
Dear Momentum Options Subscriber,
The bulls had trouble out the gate at the start of last week, as the Dow fell for the second-straight Monday. The VIX closed above 12.50, and Apple (AAPL, $115.52, up $0.39) dropped below $120 and its 200-day moving average for the first time in two years. All three of these were great clues that the rest of the week would be wild.
The Dow fell 46 points, or 0.3%, to finish at 17,373 on Friday. The blue-chips traded to a low of 17,279 while holding near-term support at 17,400-17,350 into the close. There is additional weakness to 17,200-17,000 on a drop below 17,250. Resistance is at 17,500-17,600. A move above the latter would indicate that a short-term bottom might be in.
The S&P 500 slipped 6 points, or 0.3%, to close 2,077. The index tested a low of 2,067, while support at 2,075-2,070 and the 200-day moving average was stretched. There is additional help at 2,060-2,050 on a drop below 2,065. Resistance is at 2,095-2,100 and the 50- and 100-day moving averages.
The Nasdaq declined 13 points, or 0.3%, to settle at 5,043. Tech tumbled to a low of 5,006 on Friday but was able to hold the 100-day moving average into the close. The close below 5,050 keeps risk open to 5,000-4,950. Resistance is at 5,075-5,100 and the 50-day moving average.
The Russell 2000 gave back 9 points, or 0.7%, to end at 1,206. The small-caps made a late-day fade to 1,200 and held this level into the close. There is additional risk to 1,175 if 1,190 is cracked this week. Resistance is at 1,220-1,225 and the 200-day moving average.
The S&P 500 Volatility Index ($VIX, 13.39, down 0.38) traded to a high of 14.58 intraday, with the bulls holding 15 and the 200-day moving average. The close below 13.50 and the 50- and 100-day moving averages was slightly bullish. A further push below 12.50-11.50 for several days might indicate that the worst is over.
I warned that the start of August is historically weak, and the bears took this time to do some serious technical damage. For the week, the Dow fell 316 points, or nearly 2%, while the S&P 500 declined 26 points, or more than 1%. The Nasdaq dropped 85 points, or 1.7%, while the Russell 2000 tanked 32 points, or nearly 3%.
The Dow is in danger of testing its February lows, and a “death cross” is getting ready to form between the 50-day and 200-day moving averages. This setup clearly shows risk to 17,000.
The S&P 500 is in a similar situation, as it has formed a mini death cross, with the 50-day moving average falling below its 100-day moving average. The bulls held the 200-day moving average, however, and the index is above its July lows. The uptrend channel from the February low is at 2,060, which is why any drop below this level would be a bearish development. A floodgate to 2,000 could open if 2,040 is breached. A rebound rally can’t be trusted until 2,100 is cleared and holds for several sessions.
The 50-day moving average on the Nasdaq has flattened out, but the 100-day and 200-day moving averages are still sloping slightly higher. The bears came within a six-pack of tapping 5,000 on Friday. A drop below this level will likely get 4,900 and the 200-day moving average in play. The bulls won’t have any clear momentum until they can get the index back above 5,200.
The Russell 2000 closed below its 200-day moving average last week for the first time since December of 2014. The chart shows possible cascading risk to 1,150 and the January/early-February lows if 1,200-1,190 is taken out. A mini death cross between the 50- and 100-day moving averages is also developing.
The VIX gave the best clue of all that there would be a flush lower in the market following Wednesday’s test to 10.88. I have said all summer that any closes below 11.50 would confirm strong bullish momentum, and that there could be a possible push to single digits coming into play. However, the drop to 10.88 occurred the day after Tuesday’s close at 13, with the VIX finishing above 12.50 at 12.51 on Wednesday. The 12.50-11.50 levels need to hold for several sessions to indicate that the market is calming, which is why Wednesday’s move couldn’t be trusted. On the flip side, the bears need to hold the 15 level on the VIX for a few sessions before I would roll with them for a short-term ride to 20.
I mentioned above that Apple (AAPL) shares closed below their 200-day moving average for the first time since September of 2013 last week. The move below $120 officially put shares in “correction” territory, and the bulls will need to recover that level this week.
Apple reached a 52-week high of $134.54 in late April. With shares down 14% from their all-time high, Wall Street is finding it hard to put its money where its mouth is.
I immediately did AAPL’s chart work following Monday’s technical damage and saw a possible test to $115 or $110. Shares traded to a low of $112.10 last Wednesday before bouncing back to hold $115 that day and for the rest of the week.
A mini death cross has also formed in Apple’s chart, with the 50-day moving average falling below the 100-day moving average, and both are slopping lower. There is continued risk to $110-$107.50 on a close below $112. If shares can clear $120-$120.50, it would be a bullish signal.
It is still too early to trade options on Apple until a clearer picture develops or one of the aforementioned price targets is cleared. If shares can clear $120, the AAPL September 125 calls (AAPL150918C00125000, $1.00, up $0.05) could be targeted for a bullish run back to $125-$130.
If Apple shares fall below $112, bearish traders could target the AAPL September $105 puts (AAPL150918P00105000, $1.20, down $0.05) for further weakness and a drop below $110.
Apple wasn’t the only high-profile name to see its shares take on additional turbulence. Twitter (TWTR, $27.04, down $0.50) touched fresh 52-week lows following Friday’s drop to $26.87. Shares look “cheap” at current levels, but Twitter is a much different company than Apple, with far more issues than a sagging stock price.
Twitter is trading within $1 of Wall Street’s initial public offering (IPO) price of $26 a share from November 2013. While I mentioned that shares look cheap, it wouldn’t surprise me to see them get even cheaper. There is no technical support at current levels, and the recent slide to fresh all-time lows is not an encouraging sign.
The market cap for Twitter is a little over $18 billion. Takeover rumors for the company have picked up in recent weeks, but, without a CEO, a deal is hard to do. Shares of Twitter still look risky until they recover the $29-$30 level. The announcement of a new CEO might be viewed as a positive catalyst, depending on who the company chooses, which would be the first step in stabilizing the stock.
The company has topped Wall Street estimates in five of the past six quarters, and its revenue numbers are impressive. However, the company has a broken platform and no structure. There is talk of a boardroom shakeup, so the outlook for Twitter seems murky for at least another month.
I’m still watching Twitter for a bullish or bearish entry point. If shares fall below $26.75 over the near term, traders could target the TWTR September 25 puts (TWTR150918P00025000, $0.82, up $0.13) for a test to the low $20s.
If shares can clear $30 this month, bullish traders could target the TWTR January 2016 35 calls (TWTR160115C00035000, $1.25). These call options do not expire until mid-January of 2016. At current levels, they are nearly worth the risk of a lottery ticket, but with better odds. If Twitter can clear $37.50 by mid-January of 2016, these options would be worth at least $2.50, for a 100% return from current levels.
Facebook (FB, $94.30, down $0.82) shares finished the week slightly higher, and the chart looks a lot better than those for Apple and Twitter. FB shares are well above their 50-day moving average, which is still in an uptrend. The 100- and 200-day moving averages are also sloping higher, but there is still risk to $92-$90 on a close below $94. A move past $98 would be a bullish clue that triple-digits and fresh all-time highs are back in play. Shares tapped an all-time high of $99.24 on July 21.
The FB September 105 calls (FB150918C00105000, $0.75, down $0.20) could be targeted if shares crack $98. The FB September 87.50 puts (FB150918P00087500, $1.32, up $0.10) could be used on a drop below $94.
Google (GOOG, $635.30, down $7.38) added nearly $10 last week and held crucial support at $620. I say “crucial” because shares face a drop to $580 on a close below $620. The gap-up above $580 in mid-July came on blowout earnings. Resistance is at $660-$680, and a move above these levels would be bullish. However, I don’t actively trade options on Google due to the sky-high premiums.
On a fundamental basis, Facebook ranks behind Apple and Google but ahead of Twitter, but my goal here was to highlight the divergence going on between these tech stocks. I have all of the aforementioned options trades on my watch list, along with a dozen or so more, and it’s possible that we may use them to play the market’s next major move this month and into September.
We took advantage of the market weakness at the start of August, and the middle of the month usually provides some strength following the pullback. While there could be a short-term bounce over the next couple of weeks, the bulls have a lot of work to do.
I have some short-term index option trades ready for us to play if there is a rebound, but I won’t hesitate to stay short if there is a continued breakdown. The Momentum Options portfolio has been on a roll since mid-June, and we have closed four triple-digit and nine double-digit winners since then. One trade from our last batch of recommendations is still on hold, but the portfolio is in perfect shape to play the next trend.
From desk to press, futures look like this: Dow (+57); S&P 500 (+8); Nasdaq 100 (+18); Russell (+5).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 78-26-2 (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 8:00 a.m. EST.
I hereby disclose that I will be participating in the following trade(s). Every 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 portfolio.
Krispy Kreme Doughnuts (KKD, $17.53, down $0.11)
KKD November 16 puts (KKD151120P00016000, $0.75, up $0.05)
Entry Price: $0.60 (8/6/2015)
Exit Target: $1.20
Stop Target: None
Action: Near-term support is at $17.50. A close below this level will likely get $17-$16.75 in play. Resistance is at $18, followed by $18.50-$18.75 and the 50- and 100-day moving averages.
SPDR Gold Trust ETF (GLD, $104.65, up $0.26)
GLD September 98 puts (GLD150918P00098000, $0.51, down $0.08)
Entry Price: $0.82 (7/28/2015)
Exit Target: $1.65
Stop Target: None
Action: A mini trading range has been forming since late July. Resistance is at $105-$106. A move below $104-$103.50 should get $100 and below in play.
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.
Rigel Pharmaceuticals (RIGL) September 5 calls (from 6/4/15) — The close below $3 and the 200-day moving average last week was a bearish development. These levels are now acting as short-term resistance, with risk to $2.50 on a close below $2.75. I still want to hold this position open into September, as the premium will likely stay near a nickel until then. This is our last trade from early June, but it could still turn a profit if shares clear $5 this month — Continue to hold.
Editor and Chief Options Strategist