In This Issue:

Dear Momentum Stocks Weekly Subscriber,

The bulls got their second-straight Monday win to start last week, despite another attempt by the bears to derail an end-of-summer rally.

Tuesday’s slight pullback made higher lows, and fresh support held, but Wednesday’s action and the trip to prior support levels were bearish. The bulls tried to right the ship after the Fed minutes were released, but the lower lows led to a survival Thursday.

Friday’s selloff was a sure sign that the summer of fun has ended, as the bulls were forced to go on defense.

The Dow plummeted 531 points, or 3.1%, to finish at 16,459. The blue-chips fell below the 16,800 level within the first hour of trading and took out 16,600 late in the afternoon. Short-term support is at 16,400, but a close below this level will likely lead to 16,200-16,000 and the October 2014 lows. Resistance is at 16,600.

INDU82115

The S&P 500 dropped 65 points, or 3.2%, to end at 1,970. The index broke below the 2,000 level shortly after the open, which was a sure sign that 1,975-1,970 would come into play. The bulls held this level into the close, but there is risk to 1,950-1,900 on continued weakness. Near-term resistance is at 1,985-1,990, followed by 2,000.

SPX82115

The Nasdaq tumbled 171 points, or 3.5%, to settle at 4,706. The tech index opened at 4,801 and tested 4,850 before ending at its session low. There is a good chance that the bears push 4,600 and the 2015 lows on continued weakness. There is major support at this level, but an overshoot to 4,500-4,400 can’t be ruled out. Resistance is at 4,750-4,800, but no rallies can be trusted until 4,900 and the 200-day moving average are cleared and held for a few sessions.

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The Russell 2000 stumbled 16 points, or 1.3%, to close at 1,156. The small-caps traded to an intraday low of 1,152, and I mentioned that 1,160-1,150 could come into play if 1,170 failed to hold. The one bright spot from Friday was the rebound into positive territory past 1,172 late in the afternoon. The fade into the closing bell held 1,150, with backup support at 1,140-1,125. A close below the latter will likely get 1,100 into play. Short-term resistance is at 1,175-1,180.

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The S&P 500 Volatility Index ($VIX, 28.03, up 8.89) exploded 45% after opening at 22.55. I warned of risk to 22.50-25 if 20 failed to hold from Thursday’s close at 19.14. The overshoot past these levels reached a peak of 28.38. The October 2014 high cleared 30 to reach 31.06, which are levels I would like to see hold this week. If not, the VIX could kiss 35-40. A close back below 25-22.50 would offer some relief, but the bulls need to work on getting the VIX back below 20.

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I often say that the longer the trading range, the bigger the breakout or breakdown will be. Although there were a few bullish signs to start last week, the clues for a bear attack came quickly.

The action in the VIX mid-week was very concerning, as the close above 15 was the first in 17 sessions. This was the most important clue that something nasty might be coming. The move above 20 on Friday also cleared the early-July high of 20.05 and led to additional selling pressure.

Of course, the talking heads who have ignored the VIX all year were flabbergasted and worried about the move above 20. I have mentioned numerous times over the years how the slick-talking pros have said that the VIX was broken, but that is simply not the case. I’m sure everyone is now in agreement that the VIX works when it is high, but, more importantly, the VIX works when it is in the low-teens as well. These knuckleheads just don’t follow it daily or as closely as I do.

I mentioned earlier the VIX’s trip past 30 last October and, while the picture looks ugly at the present moment, within two weeks the VIX was back below 15. I’m not so sure that the current scenario will play out the same way as last year, but I will be looking for a topping process in the VIX this week.

As a side note, traders were buying VIX call options up to the 50 strike level on Friday. I would be surprised, but not shocked, if the VIX taps that level.

The financial stocks took a beating, and that is the one sector I have repeatedly said needed to stay strong. The Financial Select SPDR (XLF, $23.64, down $0.88) closed at its session low on Friday, with backup support at $23.50 holding. The close below $24 was a bearish development, and there is further risk to $23-$22.75 and the February lows. Resistance is at $23.75-$24, followed by $24.25 and the 200-day moving average.

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Goldman Sachs (GS, $187.74, down $9.01) fell below $200 to start the week, but it traded past $203 on Tuesday. Wednesday’s range of $199-$202.75 and close above $200 left mixed clues before Thursday’s drop to $196.75. Shares opened at $193.66 on Friday, and I talked about going “short” if $195 failed to hold. From last Monday’s Weekly Issue:

“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.”

Needless to say, these options did really well, as the GS September 190 puts (GS150918P00190000, $7.55, up $5.34) soared over 240% on Friday, while the GS September 195 puts (GS150918P00195000, $10.50, up $6.27) zoomed 148%.

GS82115

The financial stocks could continue to struggle until the Fed makes a move in September. While the debate on whether to raise rates continues, I have been in the camp of those who believe that a rate hike would be bullish for the market. The uncertainty of the Fed’s decision in September is probably weighing more on the market than China’s devaluation of its currency.

A rising-rate environment is not good for consumers, but a quarter-point rate hike is needed just to get the Fed out of the market’s way. Banks make more money in a higher-rate environment, but the effect of a rate hike worries Wall Street.

There is talk that the Fed has boxed itself into a corner, as some believe that they should have already raised rates. With the market already in correction mode, the Fed can’t use the excuse not to raise rates to keep the market propped up. However, there is also talk of a recession coming, and the Fed doesn’t want to raise rates only to lower them again. In my opinion, the Fed should pull the Band-Aid off and see what happens.

The Consumer Discretionary SPDR (XLY, $74.36, down $2.46), which is an index I like to check from time to time, held its 200-day moving average last week. The stocks that make up the XLY include companies that make consumer products like food, beverages, drugs, tobacco, household products and personal products. If the index is trending higher, the market usually follows, as it reflects the strength of the economy. There is additional risk to $70-$68 if the bulls can’t hold $72 this week. A rebound back above $76-$77 would be a slightly bullish signal that the worst is over.

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The American Association of Individual Investors (AAII) Investor Sentiment Survey showed that bearish sentiment has reached 33.3%. Bullish sentiment is down to 26.8%, while neutral sentiment is at 39.8%. These sentiment readings show where investors believe the market will be during  the next six months. With bearish sentiment at a two-year high, this could be telling us something.

I don’t follow this survey often, but I like to check on the information occasionally, as it can be viewed from a contrarian standpoint. Historically, bullish sentiment has averaged 38.8% over the life of the AAII survey, while bearish sentiment has averaged 30.6%. Neutral sentiment has averaged 30.5%. Given the current readings, a bottoming process could be playing out.

For those of you that have followed me for years, you know that I have been one of the bulls’ biggest cheerleaders for the past three years, which is one reason why I haven’t bailed on them this year. However, I love making money with the bears, as my track record shows, so do not panic if the next few months get even crazier.

I find myself in this predicament every year as I often say the best money is made when Wall Street is away.  The summer grind was worth the journey as we locked-in a number of winning trades.  Wall Street will be away for another week on vacation, but the market continues to give us incredible clues about where the action is headed.  We just need to remain patient.

Although it was a rough week, our current trades held up well and we were able to cash out on Dot Hill Systems’ (HILL, $9.69, up $0.02) takeover offer for a 37% profit.

While the opportunity to go short looks compelling, I have been a little hesitant to open new short positions.  I have in years past and, it’s not that I don’t want to go short, but I’m also viewing the current correction as a possible buying opportunity.

If a bottoming process occurs this week and into next week, I will find some gems for us to go long, or possibly trade.  However, if there is continued weakness, I will look for companies with deteriorating financials and weak charts to find us the best short opportunities.

From desk to press, futures look like this: Dow (-651); S&P 500 (-73); Nasdaq 100 (-208); Russell (-41).

Chapter 1. Momentum Stocks Weekly Play List

All prices given in this update are current as of Aug. 21, 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 26-1, for a 96% win rate (143-18, or 89% win rate, overall since the start of 2011).

View the entire list of open and closed trades by clicking here.

 

Bank of America (BAC, $16.10, down $0.62)

BAC October 18 calls (BAC151016C00018000, $0.17, down $0.02)

Entry Price:  $0.45 (8/17/2015)

Exit Target:  $0.90

Return:  -62%

Stop Target:  None

Action:  Support is at $16.00 following Friday’s test close on the low.  Resistance is at $16.50-$16.75.

You can read my full write-up on BAC in the Aug. 17 Issue.

BAC82115RRLT

Rave Restaurant Group (RAVE, $10.26, down $0.14)

Original Entry Price:  $11.70 (8/17/2015)

Lowered Price from Selling Options:  None

Exit Target:  $13.00+

Return:  -12%

Stop Target:  $7.00

Action:  Support is at $10.00.  Resistance is at $10.75-$11.00.

RAVE82115

Ohr Pharmaceutical (OHRP, $2.58, down $0.02)

Original Entry Price:  $3.16 (7/28/2015)

Lowered Price from Selling Options:  N/A

Exit Target:  $6.00+

Return:  -18%

Stop Target:  $1.00

Action:  Support is at $2.50. A close below this level keeps risk open to $2.25-$2.00.  Resistance at $2.75-$2.85 and the 50- and 100-day moving averages.

You can read my detailed update on OHRP in the July 30 Issue.

OHRP82115

Limelight Networks (LLNW, $2.67, down $0.04)

Original Entry Price:  $4.03 (7/9/2015)

Lowered Price from Selling Options:  N/A

Exit Target:  $5.00-$6.00

Return:  -39%

Stop Target:  $2.00 (Stop Limit)

Action: Near-term support is at $2.40-$2.20 on a drop below $2.50.  Resistance is at $2.80-$3.00.

LLNW82115

Rave Restaurant Group (RAVE, $10.26, down $0.14)

Original Entry Price:  $13.92 (7/9/2015)

Lowered Price from Selling Options:  N/A

Exit Target:  $20.00

Return:  -26%

Stop Target:  $10.00

Action: Support is at $10.00.  Resistance is at $10.75-$11.00.

You can read my recent earnings update on RAVE and find out why it remains my No. 1 stock pick in the June 29 Issue.

RAVE82115RRLT

Rigel Pharmaceuticals (RIGL, $2.94, up $0.09)

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:  Resistance is at $3.00 and the 200-day moving average. Support is at $2.75-$2.70..

You can read my detailed write-up on RIGL in the June 8 Issue.

RIGL82115RRLT

Flex (FLEX, $10.51, down $0.22)

Original Entry Price: $12.55 (5/19/2015)

Lowered Price from Selling Options: N/A

Exit Target:  $15.00+

Return:  -16%

Stop Target: $10.00

Action:  Support is at $10.25-$10.00.  Resistance is at $11.00-$11.25 and the 50-day moving average.

You can read my detailed write-up on Flex in the July 30 Issue.

FLEX82115

Psychemedics (PMD, $11.72, down $0.27)

Original Entry Price:  $15.67 (5/5/2015)

Lowered Price from dividends: $15.52

Exit Target:  $15.75 (Limit Order)

Return:  -25%

Stop Target:  $7.75 (Stop Limit)

Dividend Yield:  4.9%

Action: Resistance is at $12.00-$12.50.  Support is at $11.50-$11.00.

PMD82115

Huttig Building Products (HBP, $3.09, down $0.04)

Original Entry Price:  $4 (8/13/2014)

Lowered Price from Selling Options:  No options available

Exit Target:  $6.00+

Return:  -23%

Stop Target:  $2.00 (Stop Limit)

Action:  Shares are holding $3.00 and the 50-day moving average with additional resistance at $3.20-$3.25.  The 100-day moving average has crossed above the 200-day moving average and is giving a bullish signal.

HBP82115

Rambus (RMBS, $12.84, up $0.39)

Original Entry Price:  $17.83 (11/14/2011)

Lowered Price from Selling Options:  $16.38

Exit Target:  $15.00+

Return:  -22%

Stop Target:  $9.00

Action: Support is at $12.75 and the 200-day moving average. Resistance at $13.00-$13.25.

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.

RMBS82115

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!

Signed

Rick Rouse
Editor
Momentum Stocks Weekly