In This Issue:
Dear Momentum Options Subscriber,
The bears got a rare Friday win, but the bulls won last week overall to cap off a fabulous October. However, the recovery from the late-August lows wasn’t enough to get all of the major indices back into positive territory for the year. The blue-chips and small-caps are still slacking, but they are making higher highs and higher lows nonetheless. This is a positive sign for the bulls, but there are other concerns that need to be addressed, as volatility is still slightly elevated.
The Dow dropped 92 points, or 0.5%, to end at 17,663 on Friday. The blue-chips tested a high of 17,799.96 intraday, with resistance at 17,800 holding by a thread. A move above this level will likely get 18,000-18,100 in play. Support at 17,600-17,575 and the 200-day moving average held into the closing bell. A drop below 17,500 could lead to a test to 17,350-17,200 and the 100-day moving average.
The S&P 500 sank 10 points, or 0.5%, to finish at 2,079. The index came within a six-pack of tripping resistance at 2,100 following a mid-day run to 2,094. Additional resistance is at 2,125. The late-day fade to the session low held short-term support at 2,075-2,070. Backup support is at 2,060 and the 200-day moving average, followed by 2,050-2,040.
The Nasdaq gave back 20 points, or 0.4%, to close at 5,053. Tech made a run to 5,085 in the afternoon, with resistance at 5,100 holding strong. A move above this level will likely lead to 5,150-5,200. I have talked about the “gap up” past 5,000, which is a level that is imperative for the bulls to hold this week on any pullback. If not, a backtest to 4,950-4,925 could ensue.
The Russell 2000 slipped 3 points, or 0.3%, to settle at 1,161. The small-caps traded to a high of 1,167 intraday but failed to clear resistance at 1,170-1,175. A move above 1,180 gets 1,200 and the 100-day moving average in play. The tumble to 1,159 ahead of Friday’s close held near-term support at 1,160. A move below this level could lead to 1,150-1,140 and the 50-day moving average.
The S&P 500 Volatility Index ($VIX, 15.07, up 0.46) closed back above 15 following a push by the bears to 15.39. Short-term resistance is at 16.50-17.50, and a close above the latter might signal that a short-term market top is in. The bulls need to get below 13.50-12.50 to start the week and keep October’s momentum going.
The gains from October helped the bulls snap a two-month losing streak, but they still haven’t fully recovered the losses from August and September. The major indices gained 8% last month, on average, with the small-caps being the weakest link.
The Dow needs 26 points to recover the previous two-month loss and is down nearly 160 points, or 0.9%, for the year. The S&P 500 is 24 points away from recovering its August and September losses, but it is up 20 points, or 1%, year to date.
The Nasdaq is off 75 points from its July close, but it is up over 317 points, or 6.7%, for 2015. The Russell 2000 recovered 61 points in October, but it needs another 77 points to recover the 138 points it lost in August and September. For the year, the Russell is down 43 points, or 3.5%.
I talked about the month of October being a bear-killer, but history kept Wall Street on the sidelines this time around, as many of the suits-and-ties have questioned the rebound.
My 10-year charts from the Sept. 8 Pre-Market Update showed that if the Dow held 16,000, there would be a good chance for a rebound off of the August lows. The bears pushed the blue-chips below the 16,000 level twice intraday in late September, but those days closed at 16,001 and 16,049. I also mentioned that a move above 17,000 would be a very bullish signal for a possible year-end push to 18,000-19,000.
The S&P 500 needed to hold 1,900-1,875 in September and gave a “caution” signal via the closes at 1,881 and 1,884 late in the month. The intraday low reached 1,871 over the two-day stretch. My readjusted year-end target was a possible trip to 2,100 if support held.
I mentioned that it would be imperative for the Nasdaq to hold 4,500 in late September, and the bears made it interesting. The Sept. 29 intraday low touched 4,487, with the close coming in at 4,517. The new crucial level that needs to hold going forward is the 5,000 mark. While this level could get stretched on any pullback this week, I talked about a possible run to 5,250-5,350 if October held up. This represents a possible 4%-6% upside move from current levels and fresh all-time highs.
The Russell 2000 needed to hold the 1,100 level in September and through earnings season, and it also caused some nervousness heading into October. The bears pushed intraday lows of 1,087 and 1,078 late in September, with closes at 1,090 and 1,083. The index closed at 1,100 to end the month but settled at 1,097 the first day of October.
Although the rebound has been impressive, the small-caps still need to clear 1,200 before I would really trust them. The late-October high reached 1,178, twice, which may have signaled a short-term top. In recent weeks, I have talked about a close below 1,140 being a potential breaking point, as it is a level that needs to hold this month. The Russell traded to a low of 1,139 last Tuesday, while closing at 1,145.
The biggest development from last week was the Federal Open Market Committee (FOMC) statement, as its slightly-more-hawkish tone left the door open for a possible December rate hike. It would be rare for the zombies to raise rates in December ahead of Christmas, but Thursday’s wacky action was led by the financial stocks.
The Financial Select Sector SPDR (XLF, $24.08, down $0.35) broke above its 100- and 200-day moving averages, which are levels that held into Friday’s close. Last week’s high reached $24.55, and a close above this level could lead to a breakout to $25-$25.50.
The U.S. dollar ($USD, $97.02, down $0.35) rebounded on the Fed news mid-week but gave back the gains to close just above $97. A rising dollar can have an adverse effect on the market, as it makes U.S. goods more expensive. A close above $98-$98.50 could lead to a breakout. Support is at $96.50, followed by $96 and the 100- and 200-day moving averages on a close below $97. The 50-day moving average has flattened out and is trying to trend higher as well.
I don’t actively trade USD, but this is a development that could become a concern. Many of the other world currencies are still in a downtrend, with negative interest rates in some countries. A stronger USD could hurt current fourth-quarter profits for U.S. companies, as goods and services become more expensive in comparison to other countries.
With the zombies possibly raising rates in December here in the United States, the European Union (EU) has shown its willingness to pursue more aggressive monetary-easing policy. Meanwhile, China’s central bank cut interest rates last month for the sixth time in less than a year. It also lowered the amount of cash banks must hold on reserve in an effort to keep its stuttering economy from collapsing.
The bounce in the dollar also produced a pullback in gold ($GOLD, $1,141.70, down $3.80). I talked about a possible short-term rally to $1,175 and the 200-day moving average last month, which was a crucial level the bulls needed to clear. The mid-month push to $1,191 fell just shy of $1,200, which is a level that I wanted to see cleared and held before possibly going long. The 50- and 100-day moving averages held into Friday’s close, but a move below $1,140-$1,135 would be a bearish development.
Silver ($15.53, down $0.04) is in the same boat after failing to hold $16 and its 200-day moving average. There is further risk to $15.25-$15 and the 50- and 100-day moving averages on a close below $15.50.
Another slightly bearish development from last week was the negative Monday/Friday closes on the Dow. Monday’s 23-point pullback was the first in a month, but the loss was minimal, while Friday’s pullback was the first in six weeks.
The positive Monday/Friday closes throughout October were very bullish signals that money was moving into the market. Negative M/F closes could signal that money is exiting the market, but there wasn’t panic selling on these days last week. Mixed start- and end-of-week closes may signal that a trading range could be developing.
This indicator is not high on my list of technical indicators, but it does help a little when trying to figure out market direction.
The chances are good that the rally from October could continue into November, as it represents the start of the “best-six-months” cycle for the market. October usually ends the “worst six months” for market seasonality, and I have mentioned that this is usually the month the bears go into hibernation.
The bulls still have some headwinds they are facing, and they might want to shake the bears to make sure they are asleep. The action in the small-caps will be the main focus again this week, along with the VIX. Friday’s jobs report will also weigh on market sentiment and could have a major impact on whether or not a Fed rate hike will arrive next month.
I plan to open up the bullish playbook if current support levels hold. I could have New Trades throughout the week, as my Watch List is loaded with a bevy of fresh ideas. I also have bearish trades ready in case it turns out that the market highs are in. Stay locked and loaded, as this week’s action could determine how the rest of the month plays out.
I also have a Trade Alert for one of our current positions listed in the “Trades on Hold” section of this update, so be sure to check that out before the open this morning.
From desk to press, futures look like this: Dow (+7); S&P 500 (+0.5); Nasdaq 100 (+6); Russell (-0.7).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 89-34-2 (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.
iShares Russell 2000 (IWM, $115.34, down $0.53)
IWM November 119 calls (IWM151120C00119000, $0.43, down $0.14)
Entry Price: $0.58 (10/29/2015)
Exit Target: $1.20
Stop Target: None
Action: There is risk to $114-$113.75 and the 50-day moving average on a close below $115. I’m looking for support to hold at $115 before an eventual run towards $120 or higher by late November. Short-term resistance is at $118-$118.50 and the 100-day moving average.
Motorola Solutions (MSI, $69.97, down $0.16)
MSI November 75 calls (MSI151120C00075000, $0.86, down $0.03)
Entry Price: $0.70 (10/22/2015)
Exit Target: $1.40
Stop Target: None
Action: Multi-year resistance is at $72.50. Support is at $69, followed by $68-$67.50 and the 50-day moving average.
The company is scheduled to announce earnings on Wednesday, Nov. 4, before the opening bell. You can read my full update on MSI in the Oct. 23 Pre-Market Update.
Kohl’s (KSS, $46.12, up $1.54)
KSS November 42.50 puts (KSS151120P00042500, $0.70, down $0.30)
Entry Price: $0.95 (10/7/2015)
Exit Target: $1.90
Stop Target: None
Action: Resistance is at $47.50-$48 and the 50-day moving average. Support is at $45-$44.75.
You can read my detailed write-up in the Oct. 7 Mid-Market Update. Earnings are due out Nov. 12.
Corning (GLW, $18.60, down $0.25)
GLW November 19 calls (GLW151120C00019000, $0.26, down $0.09)
Entry Price: $0.60 (9/16/2015)
Exit Target: $1.20
Stop Target: None
Action: Support is at $18.50-$18.25 and the 100-day moving average. Resistance is at $19.
PayPal Holdings (PYPL, $36.01, up $0.10)
PYPL January (2016) 40 calls (PYPL160115C00040000, $0.86, up $0.01)
Entry Price: $1.05 (9/14/2015)
Exit Target: $2.10 (Limit Order on first half)
Stop Target: None
Action: Resistance is at $37, and a move above this level would be a super bullish signal. Support is at $35.50 and the 10-day moving average. A close below these levels could lead to a test to $34. The 50-day moving average is leveling out following a multi-month decline.
You can read my detailed write-up on PYPL in the Sept. 15 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.
Starbucks (SBUX) November 50 puts (from 9/28/2015) — Shares tapped another 52-week high of $64 on Friday, while easily holding $60 following earnings — Sell to close the SBUX November 50 puts at the open this morning.
Financial Select Sector SPDR (XLF) November 22 puts (from 9/24/2015) — Support is at $24 and the 100- and 200-day moving averages. If XLF shares hold $23.50 this week, I will likely close the trade by Friday to save any remaining premium — Continue to hold.
Editor and Chief Options Strategist