Dear Momentum Options Subscriber,
The bulls ran into trouble on Tuesday following China’s decision to devalue its currency. The losses wiped out Monday’s gains as selling pressure picked up during the second half of trading. The technical damage was severe, and a “death cross” officially formed on the Dow Jones, with the 50-day moving average falling below the 200-day moving average.
The Dow tanked 212 points, or 1.2%, to close at 17,402. The blue-chips opened at 17,593 and traded down to 17,352 after Wall Street’s lunch break. The bulls held support at 17,400-17,350, but there is additional risk to 17,200-17,000 on a close below the latter. Resistance is at 17,600.
The S&P 500 sank 20 points, or 1%, to settle 2,084. The index opened above the 2,100 level before sinking to a low of 2,076 intraday. Support at 2,075-2,070 held, and the close above 2,080 was slightly bullish. Short-term resistance is at 2,090, followed by 2,095-2,100 and the 50- and 100-day moving averages.
The Nasdaq declined 65 points, or 1.3%, to end at 5,036. Tech opened below the 5,075 level, which led to a trip to 5,013 late in the session. The close below the 100-day moving average was slightly bearish, as it keeps risk open to 5,025-5,000. Resistance is at 5,050-5,075 and the 50-day moving average, followed by 5,100.
The Russell 2000 gave back 11 points, or 0.9%, to finish at 1,211. The small-caps opened below the 1,215 level at 1,214, which was a good clue that a backtest to 1,200 was coming. The bears pushed a low of 1,205 intraday, but support held. A move below 1,200 could lead to 1,190-1,175. Resistance remains at 1,225-1,230.
The S&P 500 Volatility Index ($VIX, 13.71, up 1.48) jumped 12% and reached a peak of 14.33. The close above 13.50 keeps risk open to 15. Another move below 12.50 would indicate continued choppy trading and the slight chance for (drumroll, please…) an end-of-summer rally.
I have several index option trades that I’m ready to roll with, but the gap-up and gap-down opens this week have made it hard to get positioned. I mentioned that mid-month might be a good time to buy stocks following the historical tendency for a pullback at the start of August, and the rest of the week could offer bullish or bearish clues as to whether the bulls will rebound or roll over into the end of the month.
If major support can hold into Friday and the market trends higher, then next week could be the setup I’m looking for to go long. However, the VIX continues to hold 15, so I’m going to stay patient over the next few days.
I have nibbled on a few trades this week, and I want to make sure I get the clues I’m looking for before opening up the playbook for our next batch of trades.
From desk to press, futures look like this: Dow (-129); S&P 500 (-15); Nasdaq 100 (-34); Russell (-10).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 79-26-2 (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.
JPMorgan Chase (JPM, $68.23, down $0.66)
JPM September 70 calls (JPM150918C00070000, $0.75, down $0.12)
Entry Price: $0.80 (8/10/2015)
Exit Target: $1.60
Stop Target: None
Action: Shares traded to a low of $67.85 yesterday, but they held support at $68 and the 50-day moving average. There is additional help at $66 and the 100-day moving average. Resistance is at $70-$71, and the 52-high is at $70.61.
KB Home (KBH, $15.36, up $0.05)
KBH October 16 calls (KBH151016C00016000, $0.61, up $0.03)
Entry Price: $0.52 (8/10/2015)
Exit Target: $1.05
Stop Target: None
Action: Resistance is at $15.50-$15.75 and the 50- and 100-day moving averages. Support is at $15-$14.50.
The company doesn’t announce earnings until late September, so we don’t have to worry about this event for another month. Although I took this trade on a technical basis, I always like to look at a company’s fundamentals to form an overall opinion of where the trade could be headed.
KB Home reported a better-than-expected quarter in mid-June, as earnings of $0.10 per share topped Wall Street’s expectations by $0.02. Revenue also came in higher at $623 million versus expectations for a reading of $619 million. The top- and bottom-line figures were impressive, but management was confident on the remainder of the year, and I liked what it had to say.
The company’s CEO said that KBH ended the quarter with a significant backlog in all four regions compared to year-ago levels. He also said that this would give the company the visibility it needed to guide deliveries and revenue numbers through year-end.
On that note, KB Home said that housing revenue would come in at $770-$810 million for the current quarter, with full-year guidance of $2.95-$3.1 billion. With other revenue streams and improving margins, earnings are likely to come in higher next month.
KBH gained 9% on the earnings beat in June and surged from $14.96 to close at $16.37 that day. Shares have given back much of those gains since despite the solid quarter, which is another reason why I like this trade. If shares clear $15.75, I’m expecting a strong push past $16 to possibly $18. If shares tap $18, these options will be at least $2 “in the money.”
If KBH shares can trade to $17 by mid-October, these options will be $1 “in the money.” This represents another 70% of upside potential if you are still waiting to get into the trade.
SPDR Gold Trust ETF (GLD, $106.26, up $0.54)
GLD September 98 puts (GLD150918P00098000, $0.31, down $0.05)
Entry Price: $0.82 (7/28/2015)
Exit Target: $1.65
Stop Target: None
Action: The close above resistance at $106 was slightly bullish, but there is now risk to $108. Support has moved up to $105. I still like this position, as it has over a month to play out.
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) — Continue to hold.
Editor and Chief Options Strategist