In This Issue:
Dear Momentum Options Subscriber,
The bulls tried to hold on to the weekly win, but the bears used the final hour of trading last Friday to get the upset. The technical damage was severe, as the indices closed below their major moving averages. The December lows are holding, for the most part, but they will be in play again if there is no rebound today and if the bottoms of the mid-October trading ranges fail to hold.
The Dow fell 367 points, or 2.1%, to settle at 17,128 on Friday. The blue-chips stayed in a steady decline throughout the session and tested a low of 17,124 in the final minutes of trading. The close below 17,200 and the 100-day moving average was a bearish development, which should bring 17,000-16,800 into play on further weakness. Resistance is at 17,350-17,400, followed by 17,550-17,600 and the 50- and 200-day moving averages.
The S&P 500 declined 36 points, or 1.8%, to finish at 2,005. The index traded in negative territory throughout the day and went out at its session low. The bulls held support at 2,000-1,990, but there is risk to 1,980-1,975 on a move below this level. Near-term resistance is at 2,025-2,030 and the 100-day moving average, followed by 2,040-2,060 and the 50- and 200-day moving averages.
The Nasdaq tanked 79 points, or 1.6%, to close at 4,923. Tech opened at 4,982 and tumbled to a low of 4,921 ahead of Friday’s closing bell. I talked about a backtest to 4,950-4,900 on continued weakness, and the bears split the middle. The close below the 100-day moving average was bearish, with further risk to 4,850-4,800 on a move below 4,900. Resistance is at 4,975-5,000 and the 200-day moving average, followed by 5,025 and the 50-day moving average.
The Russell 2000 stumbled 14 points, or 1.3%, to end at 1,121. The small-caps traded to a low of 1,120 late in the afternoon, and that level was tested into Friday’s close. A move below this level could lead to a retest to 1,110-1,100. Resistance us at 1,135-1,140, followed by 1,160-1,165 and the 50- and 100-day moving averages.
The S&P 500 Volatility Index ($VIX, 20.70, up 1.76) gained 9% after spiking to a high of 23.30 at the start of trading. The move back above 20 keeps risk open to 25-27.50. A close above the latter will likely lead to panic-selling, and the VIX could possibly reach as high as 30-35. Support is at 20-19 and the 100-day moving average, which is a level the bulls need to clear by today’s closing bell.
The Dow gave back 137 points last week, while the S&P 500 dropped 7 points. The Nasdaq fell 10 points, and the Russell 2000 slipped 2 points. Given the volatility, the bulls did a good job of keeping the score close and holding the December lows.
The monthly totals paint a different story, however, as the indices are deep in the red by 3%-7%. The Dow is down 591 points, while the S&P 500 is lower by 75 points. The Nasdaq has fallen 85 points, and the Russell 2000 have been slammed for a loss of 77 points.
The big story from last week was the fact that the Fed raised short-term rates for the first time in nearly a decade. The quarter-point hike was widely expected and removed a lot of uncertainty, but the pullback in the market afterward occurred following dovish statements.
The Fed said that it would remain data-dependent and that the possibility of future rate hikes would depend on state of the economy going forward. Much of last week’s economic data were weaker than expected, and bigger reports are due out this week.
The continued decline in oil to six-year lows hurt the energy sector and commodities last week. Brent Oil ($BRENT, $36.60, down $0.38) tested a low of $36.41 on Friday, and a close below $36 would be a very bearish sign.
The Energy Select Sector SPDR ETF (XLE, $58.79, down $1.59) closed below $60 for the first time since last September, and it is in the process of testing its Aug. 24 low just south of $58. The major moving averages are still in a downward trend, and a drop below $58.75 could lead to additional selling pressure. This is a very important development, as a test to $55 could follow a breach of that level.
To play further weakness in XLE, bearish traders could target the XLE January 54 puts (XLE160115P00054000, $0.62, up $0.16) if XLE shares fall below $58.75. These options traded over 5,000 contracts on Friday, and open interest is over 50,000 contracts.
A close back above $60 might be a bullish sign to go long XLE for a short-term trade to $62-$63. The XLE January 62 calls (XLE160115C00062000, $0.80, down $0.42) are worth watching if the bulls reclaim the $60 level.
The strong move in the U.S. dollar ($USD, $98.73, down $0.59) last Thursday was retraced on Friday, but the chart below shows the greenback in a strong uptrend. There is risk to $98 and the 50-day moving average on continued weakness, however, with resistance at $99.50-$100 over the near term.
Gold ($GOLD, $1,065.60, up $15.50) rebounded on Friday as a result of the pullback in the dollar, but it remains in a longer-term downtrend. The yellow-metal is holding the $1,050 level for now, but continued closes below this level should get the $1,000/ounce level in play. There is a good chance that gold can rally to $1,080-$1,090 on continued strength, but I wouldn’t trust any moves until $1,100-$1,125 and the 50- and 100-day moving averages are cleared. I have predicted that gold could test $900-$800 at some point in 2016.
Meanwhile, silver ($SILVER, $14.08, up $0.39) rebounded to hold the $14 level on Friday, but its chart is just as bearish as that of gold. Near-term support remains at $13.75-$13.50, but the 50-day moving average fell below the 100-day moving average last week. This suggests further weakness to $13-$12 if silver falls below $13.50.
Another area of concern is the financial sector, which pulled back significantly on Thursday and Friday after rallying into the Fed announcement. The Financial Select Sector SPDR ETF (XLF, $23.30, down $0.64) fell back below its major-moving averages last week, with backup support at $23 holding. A move below this level would also be a bearish signal. Resistance is at $23.50-$24, which are levels the bulls need to challenge and clear this week.
If XLF falls below $23, bearish traders could target the XLF January 23 puts (XLF160115P00023000, $0.36, up $0.17) for further weakness. These are relatively “cheap” and would double from current levels if XLF falls below $22.28, technically, by mid-January.
The Dow set a fresh December low of 17,124 after failing to hold the previous Friday’s low of 17,230, the S&P 500 closed below its previous low of 2,008, the Nasdaq tested a low of 4,871 last Monday, while the Russell 2000 kissed 1,108. With those levels in mind, it will be imperative for tech and the small-caps to hold their previous December lows to start this week.
The detailed charts from last Monday’s Pre-Market Update showed two sets of trading ranges for the major indices. The upper black boxes showed the trading ranges from mid-October, with the lower black boxes showing the previous trading ranges from late August through September.
If the bulls fail to regain any momentum this week, I expect that the previous trading ranges from late August through September will come into play. This could mean another 5%-7% pullback from current levels, which would be the start of a worse-case scenario.
The Nasdaq is the only major index still in the green for the year. The Nasdaq came into 2015 at 4,736 and is currently up 4%. The Dow started the year at 17,823, the S&P was at 2,058 and the Russell 2000 came into 2015 at 1,204.
While it is possible that the Dow and S&P 500 could still end the year with a gain, the small-caps likely have too much overhead resistance to clear. There are just eight trading days left in the year, including Thursday’s shortened session and Friday’s market holiday.
The talking heads will likely be disappointed if there is continued weakness this week, and they will warn that there has been no Santa Claus rally this month. Just remember, “official” Santa rallies span the last five trading days of the year and the first two sessions of the new year, providing there is one. The average gain during this time period has been 1.5% during the past 65 years.
The bad news is that if there is no Santa rally, stocks could suffer, as this time period also warns of possible, forthcoming bear markets. Trading will be tricky this week, as volume will be light, and economic news will likely influence the near-term action.
The slick-talking pros have already begun their extended holiday vacations, even though most fund managers are underperforming the market. Most of them believe that they deserve a vacation, and they will blame their dismal performance on a lackluster market in 2015.
Oftentimes, when Wall Street is away and has thrown in the towel, the market can rally. This could put the suits-and-ties behind the eight ball come 2016 if the market does turnaround and finishes the year in positive territory. However, the technical picture remains weak, so we need to wait for confirmation at the start of this week before possibly adding new long positions. If the lower levels of support fail to hold, it might mean it’s time to look at bearish positions again.
From desk to press, futures look like this: Dow (+102); S&P 500 (+15); Nasdaq 100 (+34); Russell (+5).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 98-44-2 (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.
General Electric (GE, $30.28, down $0.27)
GE January 31 calls (GE160115C00031000, $0.33, down $0.10)
Entry Price: $0.47 (12/16/2015)
Exit Target: $1.00
Stop Target: None
GE February 32 calls (GE160219C00032000, $0.30, down $0.11)
Entry Price: $0.40 (12/16/2015)
Exit Target: $0.80
Stop Target: None
Action: Support is at $30-$29.50 and the 50-day moving average. Resistance is at $30.75-$31.
You can read my detailed write-up on GE in the Dec. 17 Pre-Market Update.
Intel (INTC, $33.87, down $1.04)
INTC January 36 calls (INTC160115C00036000, $0.28, down $0.30)
Entry Price: $0.60 (12/9/2015)
Exit Target: $1.20
Stop Target: None
Action: Support is at $33.75 and the 50-day moving average. A close below $33.50 could lead to $33-$32. Resistance is at $35.
You can read a more about my thoughts on INTC in the Dec. 10 Pre-Market Update.
Medtronic (MDT, $76.31, down $1.59)
MDT January 80 calls (MDT160115C00080000, $0.35, down $0.35)
Entry Price: $0.72 (12/8/2015)
Exit Target: $1.45
Stop Target: None
Action: Support is at $76-$75.50 and the 50-day moving average. Resistance is at $77-$78.
You can read my detailed write-up on MDT in the Dec. 2 Mid-Market Update.
SPDR Gold Shares (GLD, $102.04, up $1.54)
GLD January 95 puts (GLD160115P00095000, $0.17, down $0.11)
Entry Price: $0.51 (12/2/2015)
Exit Target: $1.05
Stop Target: None
Action: Resistance is at $102.50-$103. Support is at $100. Shares traded to a low of $100.23 last Thursday.
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.
Halliburton (HAL) January 40 calls — Continue to hold.
Corning (GLW) January 20 calls — Continue to hold.
MGM Resorts International (MGM) January 25 calls — Continue to hold.
Editor and Chief Options Strategist