In This Issue:
Dear Momentum Options Subscriber,
The bulls continued their hot October run last week and got another weekly win to clear the market’s major resistance levels. The bears tried to attack the small-caps and had a little success, as the index pulled back on Friday and finished the week slightly lower.
The action in the S&P 500 Volatility Index (VIX) is pointing toward continued strength, but third-quarter earnings have been mixed thus far. With several heavyweights scheduled to report this week, the bears have a chance to do some damage if the big-cap company numbers come in below Wall Street’s expectations.
The Dow gained 74 points, or 0.4%, to close at 17,215 on Friday. The blue-chips held positive territory for much of the session before a late-day dip to 17,107. Fresh support at 17,000-16,900 has held for eight-straight sessions, with 16,800-16,700 and the 50-day moving average serving as backup.
The close above 17,200 was slightly bullish, but it failed to clear the 100-day moving average. Resistance is at 17,300-17,350, followed by 17,500-17,600 and the 200-day moving average on an overshoot.
The S&P 500 climbed 9 points, or 0.5%, to finish at 2,033. The index tested resistance at 2,025-2,030 and the 100-day moving average for much of the session before closing above these levels. Additional hurdles are at 2,050-2,060 and the 200-day moving average. Support is at 2,025-2,020 on a pullback, followed by 2,000-1,990 and the 50-day moving average.
The Nasdaq added 16 points, or 0.3%, to end at 4,886. The tech index was choppy throughout the session before the bears pushed a late-day low of 4,851. Support at 4,850 held, with backup at 4,800 and the 50-day moving average not needed. The final-hour run toward 4,900 and the 200-day moving average looked bullish. The bigger hurdles at 4,950 and the 100-day moving average need to be cleared before we can start thinking about Nasdaq 5,000 again.
The Russell 2000 slipped by half of a point, or 0.04%, to settle at 1,162. The small-caps made an opening run to 1,165 but fell shy of resistance at 1,170-1,175. The bulls held 1,160-1,155 and the 50-day moving average into the closing bell after spending the majority of the day in the red. Additional support is at 1,150-1,140.
The S&P 500 Volatility Index ($VIX, 15.05, down 1.00) collapsed another 6% on Friday following an early-morning spike to 16.86. The 17.50 level held for the second-straight session and has for five of the past seven trading days. The bulls came within spitting distance of cracking 15 into the close and signaling higher highs this week. A move down to 13.50-12.50 could come this week on continued market strength.
Last week’s test was all about the financial stocks, which is one of the key sectors I have been watching for continued market strength or for the start of some weakness. I want to cover the major companies that reported earnings last week, as the results were mixed. The technical picture for all of the stocks still looks a little bearish, so some follow-through is needed before we can trust the group.
JPMorgan Chase (JPM, $62.43, up $0.54) reported earnings of $1.68 a share, but, after adjustments, the results fell to $1.32 a share. Revenue came in at $23.5 billion versus estimates for $1.37 a share on revenue of $23.7 billion. The company’s CFO said current-quarter estimates of $1.43 a share on revenue of $23.9 billion seemed a tad high.
Wells Fargo (WFC, $52.88, up $0.19) matched estimates for $1.35 a share while topping revenue numbers with a reading of $21.88 billion versus a forecast for $21.76 billion.
Bank of America (BAC, $16.12, down $0.07) beat estimates by $0.04 after reporting earnings of $0.27 a share, but revenue came in shy at $20.7 billion versus expectations for $20.77 billion. BAC would have posted revenue of $20.9 billion without interest expenses.
Citigroup (C, $52.69, down $0.28) reported adjusted earnings of $1.31 a share on revenue $18.69 billion. The suits-and-ties had penciled in $1.28 a share on revenue of $18.54 billion.
And, finally, Goldman Sachs Group (GS, $185.18, up $0.22) missed estimates by a penny after reporting a profit of $2.90 a share. Revenues also came in light at $6.86 billion versus expectations for $7.12 billion.
All five of the aforementioned stocks have cleared or are challenging their 50- and 200-day moving averages and have a chance to make a run to their respective 100-day moving averages. However, a “death cross” formed on the charts for a few of the names in late September, and the other stocks are close to seeing their 50-day moving averages fall below their 200-day moving averages as well.
The Financial Select Sector SPDR ETF (XLF, $23.55, up $0.14) chart also shows the same technical picture, with shares holding their 50-day moving average for two-straight sessions. The 100- and 200-day moving averages are just north of $24, which is a level that needs to clear and hold this week and for the rest of October. If not, the rest of the year could be a bumpy ride. Support for the XLF is at $23.25-$23, with backup at $22.50. A move below this level might be the signal to go “short” by using put options, but I would wait for a drop below $22 just to make sure.
This week is one of the busiest weeks for third-quarter earnings. Thursday will be the market’s heaviest day, with Alphabet (GOOG, $662.20, up $0.46), Amazon.com (AMZN, $570.76, up $8.32), Caterpillar (CAT, $69.68, down $1.15), McDonald’s (MCD, $104.82, up $1.16), Microsoft (MSFT, $47.51, up $0.50) and Under Armour (UA, $100.08, up $0.59) reporting. AMZN, GOOG, and MSFT will weigh heavily on the market based on their company’s earnings results. Friday will likely be the biggest day for the market this week, as their results will be released after Thursday’s close.
Another sector I have been watching carefully is the transports. The group got a scare as Ryder System (R, $71.95, down $1.34) issued an earnings warning last week. The company cut its earnings for the recently ended quarter to $1.72-$1.74 a share from $1.82-$1.87 a share. R reports earnings Thursday, and analysts are looking for $1.86 a share.
Shares were punished following the warning, dropping from $75.65 to $68.73 last Tuesday. While Ryder did the right thing by warning Wall Street, I’m looking ahead to the numbers from United Parcel Service (UPS, $103.95, up $0.15) next week to get a better snapshot of the sector.
The Dow Jones Transportation Average ($TRAN, 8,078, down 130) is holding its 50-day moving average following Friday’s drop back below the 100-day moving average. A close below the 8,000 level could be an early warning sign with the major moving averages still in a downward trend. A move above 8,300 should lead to continued market strength, but I’m still cautious on the transports until they clear this level.
One possible earnings trade I like for this week is iRobot (IRBT, $30.33, down $0.02). The company reports earnings on Tuesday, after the close, and shares have been volatile ahead of the announcement.
The chart below shows the move from $28.50 earlier this month to north of $32 to clear the major moving averages. Shares traded lower throughout last week and are hovering just above the $30 level. The major moving averages are trying to level out following a sloping downtrend since mid-July. The action last Thursday along with Friday’s backtest stretched but held the 50-day moving average.
However, the earnings beats have been solid, as the company has topped estimates by $0.18, $0.06, $0.01 and $0.15 during the past four quarters. Revenues have topped expectations in three of the past four quarters.
On July 22, IRBT stock slipped $0.28 and, in April, shares fell $1 following the earnings release. On Feb. 5, shares fell from $31.96 to $29.15 and, on Oct. 22, 2014, shares jumped from $31.61 to close at $36.04 following the earnings announcement.
Given the choppy and slightly volatile history, I believe that IRBT shares are setting up for an 8%-10% move. I’m usually bullish on the stock, and analysts are looking for earnings of $0.23 a share on revenue of $145.34 million.
I have followed iRobot for years and have found it to be a fascinating company with takeover potential. The current market cap is just over $900 million, and Apple (AAPL) or Google could sneeze at offering a 33% premium for shares of IRBT with a takeover price north of $40. This is wishful thinking, of course, but I do like the IRBT January (2016) 33 calls (IRBT160115C00033000, $1.00, down $0.10) for a speculative trade. Aside from my personal takeover rumors, I like these options based on a breakout to higher highs on technical strength along with continually improving fundamentals.
As a safer trade, the IRBT November 32 calls (IRBT151120C00032000, $0.85, down $0.10) and the IRBT November 28 puts (IRBT151120P00028000, $0.70, up $0.05) could be used to create a “strangle” option position.
The cost for both aforementioned options would be $1.50, with the breakeven points at $33.50 and $26.50. A double would occur if shares trade to $35 or test $25 by late November. If shares stay between $32 and $28 during this time period, the options will expire worthless. However, traders could exit the position the day after earnings to take advantage of the short-term move. The gains in the call or put should offset the losses in the other to reduce losses or perhaps make a quick profit.
Before I go, I want to update my thoughts on gold briefly. The yellow metal came into last week at $1,155 an ounce and tested the $1,190 level before fading on Friday. The close at $1,177 held support and the 200-day moving average, but there is risk to $1,150-$1,140 and the 100-day moving average on a drop below $1,175-$1,170. If current support holds and $1,190 clears, a run towards $1,200-$1,225 is possible.
The SPDR Gold Shares ETF (GLD, $112.45, down $0.80) came into the week just below $111 and tested $114 last Wednesday and Thursday. The GLD November 115 calls (GLD151120C00115000, $1.25, down $0.45) I mentioned last Monday came into the week under $1 and traded to a high of $1.99. The trade is still up more than 25%, but, if you decided to take the trade and didn’t lock in profits on the move mid-week, I would suggest setting a stop to protect profits.
Silver ($SILVER, $16.03, down $0.09) has traded in tandem with gold and is also holding its 200-day moving average. The 50-day moving average is curling higher, and the 200-day moving average is leveling out. These are bullish signs that show silver could make a move towards $17-$18 by year-end if support at $16-$15 holds.
This week’s action will be exciting to follow, and I will be super busy watching our current trades while looking for new ones. Although I’m betting on the bulls to make continued higher highs, I’m watching the bears out of the corners of my eyes just in case.
From desk to press, futures look like this: Dow (-54); S&P 500 (-7); Nasdaq 100 (-13); Russell (-5).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 86-34-2 (70%). 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, $59.91, up $0.65)
QCOM November 60 calls (QCOM151120C00060000, $1.84, up $0.24)
Entry Price: $1.20 (10/9/2015)
Exit Target: $2.40 (Limit Order on first half)
Stop Target: $1.35, raise to $1.45 (Stop Limit)
Action: Raise the Stop Limit from $1.35 to $1.45.
Shares kissed $60 into Friday’s close, and the options closed at session highs. Friday’s low on the options touched $1.47.
Resistance is at $60-$60.50 and the 100-day moving average. Support is at $58-$57.
PowerShares QQQ Trust (QQQ, $108.12, up $0.45)
QQQ November 110 calls (QQQ151120C00110000, $1.18, up $0.06)
Entry Price: $1.10 (10/16/2015)
Exit Target: $2.20
Stop Target: None
Action: Shares cleared their 100-day moving average last week, and Friday’s close above $108 was a nice bonus. I talked about a run to $110 coming on continued strength. Support is at $107.50, followed by $107-106.50 and the 200-day moving average.
General Motors (GM, $33.15, down $0.17)
GM November 34 calls (GM151120C00034000, $0.65, down $0.13)
Entry Price: $0.83 (10/15/2015)
Exit Target: $1.65
Stop Target: None
Action: Support is at $33, with backup at $32-$31.75 and the 100-day moving average. Resistance is at $33.50 and the 200-day moving average, followed by $34.
I mentioned that the October option expiration on Friday would likely push shares towards $33 or $34. I would like to see $33 hold on any weakness, while strength past $33.50 would keep the momentum in play.
You can read my full update on GM in the Oct. 16 Pre-Market Update. Earnings are scheduled to be released on Wednesday.
Kohl’s (KSS, $45.93, up $0.75)
KSS November 42.50 puts (KSS151120P00042500, $0.75, down $0.17)
Entry Price: $0.95 (10/7/2015)
Exit Target: $1.90
Stop Target: None
Action: Shares peaked at $45.97 on Friday, with resistance at $46 holding. A move above this level could lead to $47.50. Support is at $45. A close below $45-$44 should lead to the low $40s. The 52-week low is at $44.04.
You can read my detailed write-up in the Oct. 7 Mid-Market Update. Earnings are due out Nov. 12.
PayPal Holdings (PYPL, $34.29, down $0.33)
PYPL January (2016) 40 calls (PYPL160115C00040000, $0.75, down $0.10)
Entry Price: $1.05 (9/14/2015)
Exit Target: $2.10
Stop Target: None
Action: Shares closed just below their 50-day moving average on Friday, but support at $34 held. There is additional help at $33 and the 10- and 20-day moving averages on a close below $34. Resistance is at $35-$36.
You can read my detailed write-up on PYPL in the Sept. 15 Pre-Market Update.
Trades on Hold — other 2015 Portfolio Open positions (3): 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.
Starbucks (SBUX) November 50 puts (from 9/28/2015) — Shares are holding resistance at $60. Support is at $58 — Continue to hold.
Corning (GLW) November 19 calls (from 9/16/15) — Resistance is at $17-$17.25 and the 50-day moving average — Continue to hold.
Financial Select Sector SPDR (XLF) November 22 puts (from 9/24/2015) — Resistance is at $24 and the 100- and 200-day moving averages. A close above these levels will likely force us out of the trade. Support is at $23.50-$23.25 and the 50-day moving average — Continue to hold.
Editor and Chief Options Strategist