In This Issue:
Dear Momentum Options Subscriber,
Last week, the market suffered one of its worst runs in months, as the bears took advantage of tax-loss selling season, tumbling oil prices and a nervous Fed. The bulls tried to maintain the bottoms of the mid-October trading ranges, but they were stretched as selling pressure picked up steam into Friday’s close.
The Dow tumbled 309 points, or 1.8%, to end at 17,265 on Friday. The blue-chips struggled at the start of trading, with the late-day low reaching 17,230. Backup support at 17,200-17,150 and the 100-day moving average held, but there is risk to 17,000-16,800 if breached. Resistance is at 17,500-17,600 and the 50- and 200-day moving averages, followed by 17,700-17,800.
The S&P 500 crumbled nearly 40 points, or 1.9%, to settle at 2,012. The index tested a low of 2,008 into Friday’s closing bell, with backup support at 2,010-2000 holding. There is risk to 1,980-1,975 on a move below the latter. The close below 2,040-2,030 and the 100-day moving average was a bearish signal, and that level now represents short-term resistance. Additional hurdles are at 2,050-2,060 and the 50- and 200-day moving averages.
The Nasdaq tanked 111 points, or 2.2%, to finish at 4,933. Tech bottomed at 4,928, and the close below the 50-, 100- and 200-day moving averages was a very bearish development. There is additional help at 4,900-4,875, with risk to 4,800 on continued selling pressure. The gap lower and failure at previous support puts resistance at 4,975-5,000.
The Russell 2000 sank 25 points, or 2.2%, to close at 1,123. The small-caps stumbled to 1,121 on Friday, and I warned about risk to 1,125-1,120 if 1,140 failed to hold. There is additional support at 1,110-1,100. Resistance is at 1,140-1,150, followed by 1,165-1,170 and the 50- and 100-day moving averages.
The S&P 500 Volatility Index ($VIX, 24.39, up 5.05) soared 26% after reaching a peak of 25.27. The bulls held 25, but there is risk of a spike to 30-35 on a continued market selloff. The bears will be trying to hold fresh support at 23.50-22.50 while building a base at 20.
In last Monday’s Pre-Market Update, I covered the major indices and detailed their trading ranges on their respective charts. The downside targets of these ranges were: Dow 17,200, S&P 2,020, Nasdaq 4,900 and Russell 1,140.
The Dow and Nasdaq held my downside targets, while the S&P 500 and the small-caps fell below these levels. Other technical damage was done, and I want to cover these developments in more detail, along with a fresh review of the charts.
The Dow held its uptrend line at 17,200 and the bottom of its mid-October trading range. A move below this level will likely open up risk to 17,000-16,800 and the top of September’s trading range. If the index fails to hold 16,800 going forward, there is a chance that 16,000 and the bottom of September’s range comes into play.
The S&P 500 dropped outside of its mid-October trading range and fell below its uptrend line at 2,060 to close out last week. September’s trading range of 1,980-1,920 could come into the mix if the bears crack the 2,000 level.
The Nasdaq was able to hold its mid-October trading range, but the close below its uptrend line and the 5,000 level was not a pretty sign. Much of tech’s action stayed between 4,850-4,650 in September, and that trading range that could be tested if the bulls fail to hold 4,900 this week.
The Russell 2000 was unable to hold its mid-November low of 1,140 and its mid-October low of 1,135, which were bearish signals, as those were levels the bulls needed to hold last week. The index made a huge move at the start of October from the 1,100 level to 1,140 in two trading days. There is further risk to 1,100-1,080 if the bulls fail to hold 1,120 this week.
The late-September low on the Russell 2000 reached 1,078, with the early October bottom reaching 1,080. A major correction could come if the Russell 2000 fails to hold 1,075, which is when I would consider loading up on bearish positions.
I wouldn’t be surprised if the aforementioned levels in the small-caps come into play ahead of Wednesday’s Fed decision on interest rates. While it could be a shaky couple of trading days until then, I would like to see 1,080-1,075 hold on the Russell 2000 as a signal that it might be safe to go long for the rest of the year and into 2016.
The action in the VIX last Wednesday confirmed that additional selling pressure could come following the intraday high of 20.13 and close at 19.61. On Thursday, I mentioned that the VIX hadn’t closed above 20 since mid-November. I also mentioned that prior to the Nov. 13 close at 20.08, the VIX had held the 20 level for 30 trading sessions. The mid-November close was followed by a test to 15 two weeks later, with the VIX bottoming out at 14.63 at the beginning of the month.
It appears that the VIX will stay above 20 for longer than a day this time around, which is why there could be a push to 30-35 on further weakness. If the VIX closes above 35, the market could implode into year-end as fund managers try to limit their losses and completely write off 2015.
One way to trade the VIX is by using the iPath S&P 500 VIX Futures ETN (VXX, 23.32, up $3.04). Needless to say, these options were active on Friday, with traders buying and selling both calls and puts.
The chart below shows the gap higher to end last week and the close above 20 and the 200-day moving average. The next layers of resistance are at 25-27, with a chance that 30 could come into play on panic selling.
The VXX December 25 calls (VXX151218C00025000, $1.35, up $1.07) closed Thursday’s session at $0.28 and surged roughly 380% on Friday. Volume came in at over 13,700 contracts, and these options expire this Friday.
The VXX January 30 calls (VXX160115C00030000, $1.46, up $0.89) zoomed 156% on Friday on volume of more than 1,200 contracts. These options could be used on a further rise in the VXX, but they are nearly 7 points “out-of-the-money” and have become extremely expensive. Friday’s high reached $2.35.
Meanwhile, the VXX December 20 puts (VXX151218P00020000, $0.30, down $0.71) fell 70% on Friday on volume of nearly 15,000 contracts. These options also expire this Friday, which would represent a lottery play on VXX closing back below the 20 level, and 19.70 just to break even. While possible, the odds are great that the aforementioned options will expire worthless by Friday’s close.
The VXX January 20 puts (VXX160115P00020000, $1.05, down $0.92) collapsed 47% on Friday on volume topping 5,500 contracts. These puts could become a little cheaper heading into the Fed meeting on Wednesday and a continued rise in VXX. If resistance at 25-27 holds this week, these options could be used as a possible trade on Thursday, Friday or early next week for a possible declining VXX into mid-January.
Another concerning development is the action in the Dow Jones Transportation Average ($TRAN, 7,524, down 146). Friday’s 2% pullback is approaching the August lows just south of 7,500. It will be imperative for the bulls to hold these levels, as a close below 7,400 would be a very, very bearish development.
The 50- and 100-day moving averages are starting to roll over, and the longer-term three-year weekly chart is showing risk of the Transports dropping to 7,250-7,000.
I covered the odds of a Fed hike and the possibilities of what the interest-rate environment could look like in 2016 in last Monday’s Pre-Market Update. If you are a new subscriber, please take the time to review my thoughts if you haven’t already.
While the Fed has said time felt good in recent weeks about hiking interest rates, one thing it probably wasn’t counting on is a falling stock market and the continued weakness in commodities and oil. Europe has started its stimulus package to try and juice up its economy, and its interest rates are headed lower.
This divergence could cause some uneasiness in the coming months with a rising dollar and a sinking euro, provided the Fed raises rates this week. If it panics and doesn’t raise rates, what little credibility it has left will be ruined.
December option expiration week is usually a bullish time period for the market. A positive close today would be helpful for a possible bullish rebound this week, but the bears will likely take advantage of the nervousness heading in Wednesday’s possible rate hike.
This week is setting up to be one of the most explosive we will see all year in the market, to the upside or downside, so be prepared for wild price swings. Once the dust settles, we should be in good position to play a possibly momentous rally if support holds. If not, it might be time to turn bearish for what could be a rocky finish to the year.
From desk to press, futures look like this: Dow (-50); S&P 500 (-4.5); Nasdaq 100 (-14.5); Russell (-6).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 95-43-2 (68%). 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.
iRobot (IRBT, $34.08, down $0.03)
IRBT January 34 calls (IRBT160115C00034000, $1.40, up $0.20)
Entry Price: $1.10 (12/10/2015)
Exit Target: $2.20
Stop Target: None
Action: Resistance is at $34.50-$35. A move above the latter could lead to a push towards $36-$37 and fresh 52-week highs. Support is at $33.50 on a move back below $34.
If shares trade above $36.20, technically, by mid-January, these options will easily double from our entry price. A “golden cross” is $0.23 away from forming, with the 50-day moving average on track to clear the 200-day moving average.
Cisco Systems (CSCO, $26.16, down $0.61)
CSCO January 27 calls (CSCO160115C00027000, $0.35, down $0.15)
Entry Price: $0.53 (12/10/2015)
Exit Target: $1.10
Stop Target: None
Action: Support is at $26, with risk to $25.50 on a close below this level. Resistance is at $26.50-$27 and the 100-day moving average.
Intel (INTC, $34.27, down $0.50)
INTC January 36 calls (INTC160115C00036000, $0.50, down $0.07)
Entry Price: $0.60 (12/9/2015)
Exit Target: $1.20
Stop Target: None
Action: Support is at $34, followed by $33.50 and the 50-day moving average. Resistance is at $34.75-$35.
You can read a more about my thoughts on INTC in the Dec. 10 Pre-Market Update.
Medtronic (MDT, $76.65, down $0.79)
MDT January 80 calls (MDT160115C00080000, $0.55, down $0.05)
Entry Price: $0.72 (12/8/2015)
Exit Target: $1.45
Stop Target: None
Action: Support is at $76, followed by $75-$74.75 and the 50- and 200-day moving averages. Resistance is at $78.
You can read my detailed write-up on MDT in the Dec. 2 Mid-Market Update.
SPDR Gold Shares (GLD, $103.11, up $0.56)
GLD January 95 puts (GLD160115P00095000, $0.24, flat)
Entry Price: $0.51 (12/2/2015)
Exit Target: $1.05
Stop Target: None
Action: Resistance is at $104. Support is at $102.
You can read my detailed write-up on Gold and GLD in the Nov. 30 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.
MGM Resorts International (MGM) January 25 calls — Support is at $21-$20.75 and the 200-day moving average — Continue to hold.
Corning (GLW) January 20 calls — Support is at $18 and the 50-day moving average — Continue to hold.
Wells Fargo (WFC) December 57.50 calls — Continue to hold.
Editor and Chief Options Strategist