In This Issue:

Dear Momentum Stocks Weekly 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.

INDU12115

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.

SPX121115

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.

COMPQ121115

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.

RUT121115

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.

VIX121115

In last Monday’s Issue, 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.

INDU121115

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.

SPX2121115

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.

COMPQ2121115

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.

RUT2121115

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.

VXX121115

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.

TRAN121115

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.

TRAN2121115

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 Issue. 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 Stocks Weekly Play List

All prices given in this update are current as of Dec. 11, 2015. I hereby disclose that I will be participating in the following trade(s).

The Momentum Stocks Weekly Closed Trade Track Record is 27-8, for a 77% win rate (144-25, or 85% win rate, overall since the start of 2011).

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

 

Honeywell International (HON, $98.23, down $3.53)

HON January 110 calls (HON160115C00110000, $0.09, down $0.07)

Entry Price: $0.85 (11/19/2015)

Exit Target: $1.70

Return: -89%

Stop Target: None

Action: Action: Friday’s drop below $100 and the major moving averages was a bearish development. There is additional risk to $96-$94 on a close below $98. I want to keep the trade open until the end of the year to see if there is a rebound, and I’m placing it on “hold” for the time being. If shares fall below $96, I will likely close the trade by sending out a Trade Alert.

HON121115

 

Planet Fitness (PLNT, $15.66, down $0.15)

Entry Price: $17.85 (9/16/2015)

Lowered Price from Selling Options: N/A

Exit Target: $22.00

Return: -12%

Stop Target: $12.00

Action: Support is at $15.50-$15. Resistance is at $15.75-$16 and the 10- and 20-day moving averages.

You can read my latest write-up on PLNT in the Nov. 16 Issue.

PLNT121115

 

Rave Restaurant Group (RAVE, $5.71, down $0.24)

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

Lowered Price from Selling Options: N/A

Exit Target: $20.00

Return: -59%

Stop Target: $5.00

 

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

Lowered Price from Selling Options: N/A

Exit Target: $13.00+

Return: -51%

Stop Target: $5.00

Action: Support is at $5.50-$5.40. Resistance is at $6.

You can read my recent update from the Nov. 19 Issue.

RAVE121115

 

Rigel Pharmaceuticals (RIGL, $3.16, up $0.01)

Original Entry Price: $3.51 (6/2/2015)

Lowered Price from Selling Options: N/A

Exit Target: $4.00-$5.00

Return: -10%

Stop Target: $2.00 (Stop Limit)

Action: Support is at $3 and the 50- and 100-day moving averages. Resistance is at $3.25-$3.30 and the 200-day moving average.

RIGL121115

 

Flex (FLEX, $10.87, up $0.07)

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

Lowered Price from Selling Options: N/A

Exit Target: $15.00+

Return: -13%

Stop Target: $9.00 (Stop Limit)

Action: Shares tested a high of $11.36 on Friday with resistance and the 50- and 100-day moving averages holding. Support is at $10.75-$10.50.

FLEX121115

 

Psychemedics (PMD, $10.69, down $0.21)

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

Lowered Price from dividends: $15.22

Exit Target: $15.75 (Limit Order)

Return: -35%

Stop Target: $7.75 (Stop Limit)

Dividend Yield: 5.6%

Action: Resistance is at $11 and the 50- and 100-day moving averages. Support is at $10.50 with risk to $10 on a close below this level.

PMD121115

 

Huttig Building Products (HBP, $3.55, down $0.03)

Original Entry Price: $4 (8/13/2014)

Lowered Price from Selling Options: N/A

Exit Target: $6.00+

Return: -11%

Stop Target: $2.00 (Stop Limit)

Action: Support is at $3.50 and the 50-day moving average. Resistance is at $3.60-$3.70.

HBP121115

 

Rambus (RMBS, $11.46, down $0.17)

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

Lowered Price from Selling Options: $16.38

Exit Target: $15.00+

Return: -30%

Stop Target: $9.00

Action: The close below support at $11.50 and the 50-day moving average was slightly bearish and reopens risk to $11.25-$11. Resistance is at $11.75-$12 and the 100-day moving average.

You can read my updated analysis on Rambus in the Sept. 17 Issue.

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.

RMBS121115

 

Trades on Hold (3): 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.

Zynga (ZNGA, March 2014) — Continue to hold.

Galena Biopharma (GALE, February 2014) — Keep Stop Limit order at $1.35 in place — Continue to hold.

Trade on!

Signed

Rick Rouse
Editor
Momentum Stocks Weekly