In This Issue:

Dear Momentum Options Subscriber,

The bulls got the Monday win last week and pushed the upper layers of resistance, while the S&P 500 Volatility Index (VIX) settled below 20. These were the first clues that an October rally could be brewing. The bears struggled to make lower lows throughout the rest of the week and failed to hold the upper downtrend channels of longer-term resistance.

Third-quarter earnings season is about to pick up steam and will likely play a major role in determining market action. The financial sector will be in focus, as a number of key players in the industry will be reporting their numbers this week.

The Dow gained 33 points, or 0.2%, to settle at 17,084 on Friday. The blue-chips made a slight backtest to fresh support at 17,000 following a low of 17,027. A move below 17,000-16,900 could lead to a retest of 16,800-16,750 and the 50-day moving average. Resistance is at 17,300-17,350 and the 100-day moving average, followed by 17,600 and the 200-day moving average.

 

The S&P 500 popped by just over a point, or 0.1%, to close just under 2,015. The index backpedaled to 2,007 intraday but easily held 2,000-1,990 and the 50-day moving average. Additional support is at 1,975-1,970 on a move below the latter. The run to 2,020 nearly tapped the lower end of the next layers of resistance at 2,025. A close above this level could lead to a test to 2,050-2,060 and the 100- and 200-day moving averages.

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The Nasdaq jumped 19 points, or 0.4%, to finish at 4,830. Tech flirted with fresh support at 4,800 following Friday’s slight pullback to 4,804. Additional help is at 4,750-4,700, while a move below the latter would be a bearish development. Lower resistance at 4,850 came into play following the rebound to 4,841, but the bulls failed to hold the 50-day moving average by a nickel. A move above upper resistance at 4,900-4,925 and the 200-day moving average could lead to a push to 4,950-5,000 and the 100-day moving average.

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The Russell 2000 climbed 2 points, or 0.2%, to end at 1,165. The small-caps traded in a tight 6-point range, with support at 1,160 holding on the dip below 1,163. There is risk to 1,150-1,140 on a close below 1,160. The crawl to 1,168 afterwards fell shy of near-term resistance at 1,170-1,175. A run to 1,990-2,000 could come if 1,175 holds on any closes this week.

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The S&P 500 Volatility Index ($VIX, 17.08, down 0.34) tested a high of 18.20, but the bears failed to challenge 18.50-19, let alone the 20 level. The bulls held the 17.50 level for the second-straight session, with Friday’s low touching 16.89. A drop below 15 would confirm that the October rally is real, but that level would need to hold for several sessions.

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The bulls enjoyed one of their better runs of the year last week, as the indices posted their largest gains since February. The 3% gain, on average, cleared the downtrend channels that I charted in last Monday’s Pre-Market Update, for the most part. If you are a new subscriber, please take a quick peek at them to get an overview.

The Dow needed to hurdle 16,600-16,700 and a still-downtrending 50-day moving average to clear its upper downtrend channel and the top of its trading range. The 100-day moving average is 234 points away, or more than 1%, and is still in a downtrend. The 200-day moving average is 520 points, or roughly 3%, away from current levels, but it seems to be leveling out.

The S&P 500’s move above 2,000 and the descending 50-day moving average took care of business on its breakout to higher highs. A sloping 100-day moving average is 32 points away, or 1.5%. The 200-day moving average is a little more than 2%, or 47 points, away from being tripped, and it also seems to be leveling out.

The Nasdaq needs to take out 4,850-4,875 before it clears its upper downtrend channel and the top of the late-August trading range. Tech is 5 points away from clearing the sloping 50-day moving average and 78 points from topping the leveling 200-day moving average. The 100-day moving average is 126 points, or more than 2%, away from being cleared. I’m watching this week to see if the 100-day moving average holds above 4,950.

Meanwhile, the Russell 2000’s move above the downward-sloping 50-day moving average and the upper downtrend channel at 1,160 was a bullish sign. However, the upper trading range at 1,200 hasn’t been cleared. The still-sliding 100-day moving average is 45 points, or 4%, away, while the flattening 200-day moving average is 53 points, or nearly 5%, away from being tripped.

I talked about a possible rebound to the major moving averages once the trading ranges were cleared. This week’s earnings announcements include a number of Dow blue-chips and S&P 500 companies, and their results will influence the indices as the earnings cycle continues for the next few weeks.

I want to focus on the financial players this week, and JPMorgan Chase (JPM, $61.93, down $0.20) will lead the parade following Tuesday’s close. Bank of America (BAC, $15.58, down $0.17) and Wells Fargo & Co. (WFC, $52.14, down $0.40) will announce their results Wednesday morning, while Citigroup (C, $51.38, down $0.27) and Goldman Sachs Group (GS, $179.19, down $1.88) will confess their numbers ahead of Thursday’s open.

JPMorgan Chase is expected to earn $1.37 a share on revenue of $23.7 billion. This is one of my favorite names to trade options on, and the company has beaten estimates in the past two quarters by $0.10 and $0.05, respectively. However, in the previous two quarters, JPM missed by $0.12 and $0.02. Revenues have topped Wall Street’s estimates in three of the four previous quarters.

Shares gained more than $1 after the July and the August earnings beats. Shares fell $2 on the January earnings miss and, last October, shares fell $2 intraday before closing just $0.17 lower.

These minuscule moves haven’t been good for trading directional options like calls and puts ahead of earnings. While there may have been a chance to make decent double-digit gains trading options on JPM, it may now be better to trade bullish or bearish option spreads based on how you feel about the stock.

You could also “sell to open” a call or put option to collect the premium, but I have never really liked this strategy. While you can easily “buy to close” the option back to “cover” the position, you have to jump through hoops to sell naked options. It also means that you have to have enough capital to cover the cost of the 100 shares you are selling options against for every contract you sell.

With that said, given the recent low of $49.71 in late August and the tight $6 trading range since the rebound, a big move could be forthcoming. For this reason, I decided to look deeper into a possible earnings trade.

Shares have stayed between $64 and $58 throughout September and into October and could break out or break down above or below these levels. I doubt shares will move $6, or 10%, following JPM’s earnings update, but $3, or 5%, is possible given the recent overall market volatility.

The JPM October 64 calls (JPM151016C00064000, $0.18, down $0.12) and the JPM October 60 puts (JPM151016P00060000, $0.30, down $0.09) are “cheap” options that could be used by bullish or bearish traders to play a possible $2-$3 swing in the stock.

A $3 move to the upside would have shares above $65, with the JPM October 64 call options at least $1 “in the money.” From $0.18-$0.20, this would represent a 500% return. The breakeven point is if JPM shares are trading at $64.18.

A $3 move to the downside would have shares pushing $59, with the JPM October 60 put options at least $1 “in the money.” From $0.30, this would represent a 233% return. The breakeven point is if JPM shares are trading at $59.70.

These are the potential big rewards of going long call or put options ahead of the earnings announcements. However, the two main risks are that these options expire this Friday and, if shares move $2 or less, both options could expire worthless.

JPM shares closed Friday’s session below their 200-day moving average, which is a level that has held since mid-September. If shares can clear this level ahead of today’s close, perhaps it would be a bullish sign. However, the 50-day moving average also fell below the 100-day moving average in mid-September and appears to be working its way towards a potential “death cross” with the 200-day moving average.

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A strangle trade with the two aforementioned options would cost roughly $0.50 to play, together, with the breakeven points with JPM shares trading at  $64.50 or $59.50. A double would occur if shares clear $65 or fall below $59.

I like the odds of the strangle option trade more than I do a directional option trade, but, again, these options expire this Friday. The gambler in me says shares could move $3, but my money says shares might only move $1-$2.

I don’t like to gamble with my money, so I will likely be sitting on the sidelines when JPM reports. However, that doesn’t mean I won’t be watching the action.

One commodity I want to talk about quickly is gold ($GOLD, $1,155, up $17). The yellow metal had a strong week following a move above the 100-day moving average and the 50-day moving average the prior week. The bounce off of the $1,100 level earlier this month looked like a near-term low and a bottom that has held since early August. The next hurdles are in the $1,170-$1,180 range and at the 200-day moving average.

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If gold remains strong this week, take a look at the SPDR Gold Shares ETF (GLD, $110.87, up $1.73). A run to $113 and the 200-day moving average looks like it’s within reach, and a move above this level could lead to a run past $115.

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The GLD November 115 calls (GLD151120C00115000, $0.95, up $0.30) were up 46% on Friday and could run further if gold maintains its momentum.

Last week’s up-Monday and up-Friday on the Dow were also bullish signals, as they showed that money was moving into the market. The bulls need to keep this trend going and also get the VIX below 15 this week.

From desk to press, futures look like this: Dow (+14); S&P 500 (+0.25); Nasdaq 100 (+3); Russell (+1.3).

Momentum Options Play List

Closed Momentum Options Trades for 2015: 85-33-2 (71%). 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.

 

Qualcomm (QCOM, $57.78, up $0.12)

QCOM November 60 calls (QCOM151120C00060000, $1.15, up $0.04)

Entry Price: $1.20 (10/9/2015)

Exit Target: $2.40

Return: -4%

Stop Target: None

Action: Shares were above $60 before the Aug. 24 selloff to $52.59 and close at $55.28. Last week’s close above the 50-day moving average was bullish, and a clear shot a $60 is looming.

The Aug. 21 close was $57.61, and the Aug. 20 close was $60.15. Shares held $57.61 on back-to-back sessions last week and during the one day of resistance. The next hurdles are at $60-$60.25. A close above the latter and the 100-day moving average should get $62-$63 in play. Support is at $56 on a close below $57, with risk to $54 on a breach below both levels. If shares clear $62.50 by mid-November, these options will easily double from current levels.

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Kohl’s (KSS, $47.27, up $0.62)

KSS November 42.50 puts (KSS151120P00042500, $0.69, down $0.11)

Entry Price: $0.95 (10/7/2015)

Exit Target: $1.90

Return: -27%

Stop Target: None

Action: Resistance is at $47.50-$48. A close above the latter could lead to a retest of $50. I like the trade as long as $52 and the 50-day moving average holds. Support is at $46-$45.

You can read my detailed write-up in the Oct. 7 Mid-Market Update. Earnings are due out Nov. 12.

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Starbucks (SBUX, $60.07, up $0.61)

SBUX November 50 puts (SBUX151120P00050000, $0.30, down $0.03)

Entry Price: $0.90 (9/28/2015)

Exit Target: $1.80

Return: -67%

Stop Target: None

Action: Shares are in blue-sky territory after reaching a fresh 52-week and all-time high of $60.11. Support is at $58, followed by $56.50 and the 50-day moving average. If shares clear $62-$62.50, I could exit the trade. In the meantime, I’m placing the trade on hold, and it will appear in the “Trades on Hold” section of subsequent updates.

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Financial Select Sector SPDR (XLF, $23.24, down $0.15)

XLF November 22 puts (XLF151120P00022000, $0.24, up $0.03)

Entry Price: $0.66 (9/24/2015)

Exit Target: $1.35

Return: -64%

Stop Target: None

Action: Resistance is at $23.50-$23.75 and the 50-day moving average. A close above the latter could lead to a test to $24 and the 100- and 200-day moving averages. Support is at $23-$22.50. We should get a good idea of how this trade will hold up following this week’s earnings from the financial sector.

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Cisco Systems (CSCO, $27.91, flat)

CSCO November 27 calls (CSCO151120C00027000, $1.52, flat)

Entry Price: $0.62 (9/16/2015)

Exit Target: $1.75 (closed first half at $0.87 on 10/5/2015)

Return: 93%

Stop Target: $1.30 (Stop Limit)

Action: Shares touched $28.15 on Friday, with the options peaking at $1.65. Resistance at $28 held into the close. Additional hurdles are at $28-$28.50. Support is at $27.50-$27.25 and the 100- and 200-day moving averages.

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Corning (GLW, $17.52, down $0.45)

GLW November 19 calls (GLW151120C00019000, $0.28, down $0.10)

Entry Price: $0.60 (9/16/2015)

Exit Target: $0.75

Return: -53%

Stop Target: None

Action: Support is at $17.50 and the 50-day moving average, followed by $17. Resistance is at $18-$18.50, followed by $18.75 and the 100-day moving average.

You can read my take on GLW in the Sept. 17 Pre-Market Update. Earnings are due out on Oct. 27.

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PayPal Holdings (PYPL, $32.06, up $0.39)

PYPL January (2016) 40 calls (PYPL160115C00040000, $0.55, up $0.10)

Entry Price: $1.05 (9/14/2015)

Exit Target: $2.10

Return: -48%

Stop Target: None

Action: Resistance is at $32.75-$33 and the 20-day moving average, followed by $34. Support is at $31-$30 on a close back below $32.

You can read my detailed write-up on PYPL in the Sept. 15 Pre-Market Update.

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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.

Sony (SNE) October 24 puts (from 9/22/15) — Shares are trapped between the 50- and 200-day moving averages. I would like to see a close below $26 today or tomorrow. If not, I will likely close the trade mid-week, as these options expire on Friday — Continue to hold.

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Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options