In This Issue:
Dear Momentum Options Subscriber,
Wall Street was thrown a curveball last week following China’s decision to devalue its currency. While it was a surprise to the suits-and-ties, it shouldn’t have been when it comes to the country’s politics.
With economic growth slowing, China embarked on its own quantitative easing program. It was the biggest bet the country has made in the last decade concerning its economy, and it looks like an “all-in” move.
The good news is that the bulls may have survived the most ferocious blows the bears have dealt all year. The bad news is that the market is still on pins and needles.
The Dow jumped 69 points, or 0.4%, to end at 17,477 on Friday. The blue-chips tested 17,394 on the open, but the 14-point loss easily held support at 17,400-17,350. The late-session run to 17,492 fell shy of clearing resistance at 17,600. There are additional hurdles at 17,775-17,800 and the 50-day moving average. A move above the latter would be bullish and would support staying long. A close below 17,400-17,350 will likely ruin any chance for an end-of-summer rally.
The S&P 500 added 8 points, or 0.4%, to finish at 2,091. The index slipped to a low of 2,080 intraday, with the bulls holding support at 2,075-2,070 and the 200-day moving average. The pop to 2,092 in the second-half of the session fell short of clearing resistance at 2,095-2,100 and the 50- and 100-day moving averages. A close above 2,100 could lead to a retest of 2,125-2,135.
The Nasdaq gained 14 points, or 0.3%, to close at 5,048. Tech traded down to 5,012 ahead of Wall Street’s lunch break and split support at 5,025-5,000. The push past resistance at 5,050 reached 5,051, with the 100-day moving average holding into the close. There is additional resistance 5,075 and the 50-day moving average, followed by 5,100-5,125.
The Russell 2000 rallied 8 points, or 0.7%, to settle at 1,212. The small-caps were weak throughout the first half of the action and traded to a low of 1,199. Support at 1,200-1,190 held before the bulls made a run to close at the session high. Resistance at 1,215 held, and there are additional barriers at 1,225-1,230. A bearish development has occurred, as the 50-day moving average has fallen below the 100-day moving average just below the 1,250 level.
The S&P 500 Volatility Index ($VIX, 12.83, down 0.66) tested a high of 13.87, with resistance at 14-15 and the 100-day moving average holding. The close below 13.50 at the 12.80 level was a bullish sign. A finish below 12.50-11.50 would confirm further bullish momentum.
The major clues from last week were the action in the VIX and the Monday/Friday closes. As simple as it sounds, I wanted to see a higher Monday/Friday close on the Dow last week. The bulls snapped a two-session Monday slide on the Dow and cleared prior resistance at 17,600. Friday’s win broke a four-session Friday skid on the blue-chips. These were helpful clues that money might be moving into the market despite the cross-current winds. Check One.
I also wanted to see the VIX hold 15. Check Two. In fact, the VIX has closed below the 15 level for 14-straight and 24-of-the-past-25 sessions. The index was stretched mid-week when the bears tapped 16.28. We won’t flinch or go “short” until 17.50 is cleared and held on back-to-back closes.
Although the backslide to 17,125 on the Dow mid-week might have worried Wall Street, I have been planning for weakness until mid-August, as I prepared us and mentioned repeatedly in late July that we could see the index move 1,000 points this summer.
The July 20 high reached 18,137, which represented a short-term double top. Last Wednesday’s low of 17,125 marked a 1,012-point move in 17 sessions from peak to trough.
Aside from the Monday/Friday closes last week, I said to clue-in on the action in the VIX. I have been one of the few voices, and possibly the only voice, that has said that the VIX could test single-digits at some point this year, and we have come close to seeing this happen. As much as it gets bashed and ignored by the slick-talking pros, the VIX has been and continues to be our bread-and-butter indicator for getting a read on the market’s pulse.
The “flash crash” to 10.88 on the VIX at the beginning of the month was a blessing, as it confirmed any market top ahead of the historically weak start to August. The drop below its two levels of support looked funny, which is why I said it couldn’t be trusted. The VIX is giving good clues, but it still has to be analyzed carefully. The talking heads say to ignore the VIX until it hits 20. If there is a return to this level this month or next, we will likely be one step ahead of Wall Street with potential “short” positions.
Checking in on gold ($GOLD, $1,113, down $1), the yellow metal is trying to make a rebound back to resistance at $1,140-$1,150 and the 50-day moving average. Gold held the $1,080 level at the beginning of the month and has rebounded nicely after holding support and building a base. Although the move has been impressive, the major moving averages are still sloping lower.
A move above $1,150-$1,175 would start to improve the technical picture, but I wouldn’t trust a solid rebound in gold until the $1,200 level and the 200-day moving average is cleared. The end-of-week action looks bearish and might suggest that a short-term top at $1,125 is in. A close back below $1,100 looks like it might be the area to start fresh “short” positions.
As far as silver ($SILVER, $15.22, down $0.18), its technical setup is improving following a bottoming process near the $14.50 level. The close above $15 mid-week looked bullish at first, but silver is struggling to hold its 50-day moving average. The major moving averages are still sloping lower, and another drop below $15 would also confirm that a possible short-term top is in. I like the idea of nibbling at silver at current levels, but I would wait until $16.25 and the 200-day moving average are cleared before loading up on the “poor man’s gold.”
Oil is getting cheaper again and is now at six-year lows. A big rise in stockpiles here in the United States seems to have added to the growing global glut and continued talk of lower prices. It’s possibly that Brent oil could hit the low-$40 level, as you can see from the 10-year chart below.
The Transports may have formed a temporary bottom following Friday’s recovery of the 50-day moving average. Last week’s drop below 8,200 may have been the capitulation moment the index needed for a short-term rebound. Bigger hurdles remain at 8,500 and the 100-day moving average, but all of the major moving averages are starting to level out. Another drop below 8,200-8,150 would be a bearish development.
I talked about the mini “death cross” that formed in Apple’s (AAPL, $115.96, up $0.81) chart last week, and the gap between the 50-day moving average and the 100-day moving average has gotten wider. The spread last week was $0.77, and it is now at $1.62.
I also mentioned that there was continued risk to $110-$107.50 on a close below $112. Although there hasn’t been a close below this level, AAPL registered a mid-week low of $109.63 before shares finished the session higher at $115.24.
I also said that if AAPL shares can clear $120-$120.50 and the 200-day moving average, it would be a bullish signal. Before I put the cart in front of the horse, however, Apple needs to clear $116.25-$116.50. Another move below $113.50 would be bearish.
As far as the financials go, they have been a mixed bag, but most of them are showing bullish signals. They will need to rebound this week and next to support a rally off of the lows.
Goldman Sachs (GS, $202.02, up $1.28) made a backtest towards its 200-day moving average following last week’s drop to $196.58. Shares need to rally another $8 and clear $210 and a downward-sloping 50-day moving average before the technical picture improves.
Short-term bullish traders could target the GS August 205 calls (GS150821C00205000, $0.85, up $0.10) for a run past $205 this week, but these options expire on Friday, so they are risky.
Longer-term bearish traders could target the GS September 190 puts (GS150918P00190000, $1.35, down $0.20) on a drop or close below $195. If $210 holds as resistance on a rebound rally, these options will get cheaper, so traders could watch the GS September 195 puts (GS150918P00195000, $2.30, down $0.30) as well.
Bank of America (BAC, $17.70, up $0.08) might be a more attractive play, as it is another financial stock showing strength. Shares held on last week’s backtest to $17, with the 50-day moving average getting stretched and holding into Friday’s close. “Golden crosses” formed in mid-June and late July, with the 50-day moving average and 100-day moving average crossing above the 200-day moving average.
There are “cheaper” ways to play BAC than there are GS, which is why I could take action in BAC this week. I could buy call options, and I have looked at numerous setups to play a possible run to $18-$18.50 over the near term, and possibly $20 by year-end.
Bullish traders could target the BAC September 18 calls (BAC150918C00018000, $0.28, up $0.01) for a possible run to higher highs and fresh 52-week peaks north of $18.48. This option traded nearly 12,000 contracts on Friday.
If BAC shares can reach $18.55-$18.60 by mid-September, the aforementioned call options will easily double from current levels, as they would be $0.55-$0.60 in the money. If shares tap $19 by this time frame, the options will be worth $1, and the return would be more than 200%. If support holds and I take action, I will send a possible New Trade Alert at some point today.
I will be reviewing the 10-year charts at the end of the month and over the upcoming U.S. Labor Day holiday on Sept. 7. While I have been peeking at them, I’m hoping that the bulls can follow through with an end-of-summer rally. From there, I can forecast how September, October and possibly the rest of the year might play out.
From desk to press, futures look like this: Dow (-16); S&P 500 (-3); Nasdaq 100 (-4); Russell (-1).
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.
iShares Russell 2000 (IWM, $120.36, up $0.77)
IWM September 123 Weekly calls (IWM150904C00123000, $0.56, up $0.11)
Entry Price: $0.52 (8/14/2015)
Exit Target: $1.05
Stop Target: None
Action: Near-term resistance is at $121 and the 200-day moving average. A close above this level would be bullish. If cleared, I’m looking for a quick run to $123-$124 over the next couple of weeks. However, the 50- and 100-day moving averages are still sloping lower. This concerns me, but this is why I used the weekly options to play a short-term move up to $123.50-$124. This is likely where we will take profits. From there, we can use call options on a breakout above $124 or put options for a possible nasty backtest to $120. A drop below $119-$118 this week would be bearish and would likely force an early exit.
PowerShares QQQ Trust (QQQ, $110.51, up $0.17)
QQQ September 112 Weekly calls (QQQ150904C00112000, $0.82, up $0.05)
Entry Price: $0.95 (8/13/2015)
Exit Target: $1.90
Stop Target: None
Action: The QQQs traded up to $110.67 on Friday. Resistance is at $112. Support is at $110 and the 50-day moving average. Backup support is at $109 and the 100-day moving average. A close below this level will likely force us out of the trade.
The technical picture shows Tech flattening out. I’m looking for another push to $113-$114, which is where we can likely lock in profits.
JPMorgan Chase (JPM, $67.89, up $0.34)
JPM September 70 calls (JPM150918C00070000, $0.54, down $0.03)
Entry Price: $0.80 (8/10/2015)
Exit Target: $1.60
Stop Target: None
Action: Shares traded to a high of $67.91 on Friday, with resistance at $68 and the 50-day moving average holding. A move above this level will likely lead to a run towards $70. Support is at $66-$65.75 and the 100-day moving average.
KB Home (KBH, $15.66, up $0.13)
KBH October 16 calls (KBH151016C00016000, $0.80, up $0.05)
Entry Price: $0.52 (8/10/2015)
Exit Target: $1.05
Stop Target: $0.55, raise to $0.65 (Stop Limit)
Action: Raise the Stop Limit from $0.55 to $0.65.
Resistance at $15.75 and the 50-day moving average was challenged on Friday, as shares finished a penny off of their high. A close above this level should lead to a run past $16. Support has moved up to $15.50-$15.25 and the 100- and 200-day moving averages.
You can read my detailed write-up on KBH in the Aug. 12 Pre-Market Update.
Trades on Hold — other 2015 Portfolio Open positions (2): 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) — Shares continue to struggle with resistance at $3 and the 200-day moving average. A move above this level would be bullish. There is still risk to $2.60-$2.50 on closes below $2.75-$2.70 — Continue to hold.
SPDR Gold Trust ETF (GLD) September 98 puts (from 7/28/15) — GLD held resistance at $108 last week. There is additional risk to $109.50-$110 and the 50-day moving average. A close above this level will likely force us out of the trade, but I’m still bearish on gold for the time being — Continue to hold.
Editor and Chief Options Strategist