In This Issue:
Dear Momentum Options Subscriber,
The market was relatively flat on Thursday, as the major indices ended mixed at the close of the shortened trading session. However, it was a big week for the bulls, as they held the lower ends of the trading ranges that have developed since October.
The nearly three-month battle will likely last into the new year and the start of fourth-quarter. The bears are keeping volatility elevated as we head into the last trading week of the year, and they will be fighting hard to keep the upper ends of the trading ranges in check.
The Dow dipped 50 points, or 0.3%, to settle at 17,552 on Thursday. The blue-chips tested an intraday low of 17,543, with support at the 200-day moving average holding. There is additional help at 17,400-17,350, followed by 17,200-17,150 and the 100-day moving average on another drop below 17,550-17,500. The late-day run to 17,606 tested resistance at 17,600 and the 50-day moving average, but the bulls failed to hold these levels. A stronger move past 17,600 could lead to a retest of 17,800-17,900.
The S&P 500 slipped 3 points, or 0.2%, to finish just under 2,061. The index traded down to 2,058 shortly after the open, with short-term support at 2,060 holding. The close below the 200-day moving average was slightly bearish and keeps risk open to 2,040-2,035. A move below the latter could lead to a retest of 2,025-2,020 and the 100-day moving average. Thursday’s high touched 2,067 and cleared the 50-day moving average briefly, but there is further resistance at 2,070-2,075. A move above 2,080 should get the 2,100 level in play.
The Nasdaq added 2 points, or 0.1%, to close a 5,048. Tech held positive territory for much of Thursday’s action despite the morning trip to 5,043. Support at the 50-day moving average held, and backup at 5,025-5,000 was not needed. A drop below the latter and the 200-day moving average would be a very bearish development. Short-term resistance is at 5,075-5,100. A close above the latter this week could have the index challenging fresh highs into January.
The Russell 2000 gained 2 points, or 0.2%, to end at 1,154. The small-caps held shaky support at 1,150 following a trip to 1,151 during the first half-hour of trading. Additional support is at 1,140-1,135. The late-day surge to 1,159 fell shy of resistance at 1,160-1,165 and the 50- and 100-day moving averages. A close above these levels could lead to a run at 1,175-1,180.
The S&P 500 Volatility Index ($VIX, 15.74, up 0.17) traded up to 15.88 on Thursday, with the bulls holding resistance at 16.50-17.50 and the 50- and 200-day moving averages. A move above the latter could lead to a retest of 19-20 and the 100-day moving average. The sudden reversal to 14.45 just ahead of the closing bell looked bullish, but the index failed to hold 15. It will be hard to trust the current rally until this level is cleared and held for several sessions.
The market made higher highs and higher lows over the past week, but it still has some work to do with the blue-chips and small-caps. The bulls need to make up 272 points to get the Dow into positive territory for the year. The Russell 2000 is down 50 points for 2016 and will need to rally more than 4% this week to get above 1,204.
The S&P 500 is showing a slight gain of nearly 3 points and will need to hold 2,058 into Thursday’s close to end the year in the green. The Nasdaq is in pretty good shape to finish 2015 in positive territory. The index is up 312 points year-to-date, or more than 6%, and is unlikely to give up all of its gains in the last four trading sessions of 2015.
I mentioned last week that the small-caps would likely close lower for the year, but I still have high hopes that the other three major indices will finish higher. The small-caps would need to rally more than 1% per day this week to get back into the black, which is possible but not probable.
There is also the chance that three of the four major indices could finish the year in negative territory. This would make for some unlikeable headlines heading into 2016, which could keep Wall Street and investors cautious.
I have been mentioning the “golden crosses” that have been developing throughout the month, and the Dow, S&P 500 and Nasdaq are currently holding this bullish technical pattern. The Russell 2000 formed a “mini” golden cross last week, as the 50-day moving average crossed above the 100-day moving average. The golden crosses are still fresh, so we need to be careful and confirm that they hold into January.
I have been talking about the financial stocks and how they needed to lead the next leg of any possible rally, and they performed well last week. The Financial Select Sector SPDR (XLF, $24.01, down $0.02) was strong throughout last week and finished just below its 50-day moving average. Support at $23 was solid as a rock, and a golden cross officially formed on the chart as well. Continued closes above $24 would be bullish. Additional resistance is at $24.25-$24.50. A close above the latter could get $25 and the 52-week high of $25.62 in play.
The XLF January 24 calls (XLF160115C00024000, $0.40, down $0.04) are only “in the money” by a penny, so these options are mostly premium. While bullish traders could target these calls for a short-term trade, the problem is that these options expire in less than three weeks. However, the risk/reward is compelling, as these options would double, technically, if XLF shares are trading at $24.80 by mid-January.
This would only require a 3% move in XLF shares by mid-January for the aforementioned call options to double. The only problem I have here is that this weekend is another three-day holiday weekend, and U.S. markets are closed this Friday on New Year’s Day.
The XLF February 25 calls (XLF160219C00025000, $0.22, down $0.02) are nearly $1 “out of the money,” but they would provide an extra month for the trade to play out. This trade would break even if XLF shares are at $25.22, technically, by the closing bell on Feb. 19. These options would double from current levels if shares of XLF trade above $25.45 by late February. This would require shares of XLF to rally nearly 7%.
As far as the banking stocks go, Wells Fargo (WFC, $54.82, down $0.22) is challenging $55 again after forming a golden cross last week. The chart below shows major resistance at $56, which is a level that has previously failed three times since early November. A move above this level would be super bullish for a possible run at $58 and fresh 52-week peaks north of $58.77.
I have talked before about the timeframe for the WFC January and February options, and I have added a possible WFC option play to my watch list. The WFC February 57.50 calls (WFC160218C00057500, $0.42, down $0.06) look attractive at current levels. Shares would need to push $58 by Feb. 19 to break even on the trade. These call options would return 100% from last Thursday’s close if shares trade above $58.35.
The Dow Jones Transportation Average ($TRAN, 7,622, up 12) is still in a funk, with the major moving averages sloping lower throughout December. Recent support at 7,400 was tested and held, but there are several layers of resistance ahead. The first layers are at 7,700-7,800, followed by 8,000 and the 50- and 100-day moving averages. A close below 7,400-7,350 would be a very bearish development going forward.
The talking heads were happy to say that Santa visited Wall Street ahead of Christmas, as the official “Santa Claus” rally started last Thursday with mixed results. This market “phenomenon” occurs during the last five trading days of the year and lasts into the first two sessions of January. It would be nice if the market trades higher during this timeframe, but I’m banking more on the technical outlook than “ho ho hos.”
I said that there was a good chance that the bottoms of the trading ranges from October would hold, and I explained how the market could rally during the final two weeks of the year while Wall Street basically takes off for vacation. While I believe that the current rally can last into mid-January, this week will be crucial in determining that outcome. The bulls need to challenge and hold upper resistance and the tops of the trading ranges. If not, the bullish technical setups could turn bearish, and January could be a rough month.
The portfolio will likely see a lot of action this week, as I will be clearing out trades that are struggling while possibly adding new ones. It has been another tremendous year for the Momentum Options portfolio, with a winning percentage of nearly 70% on close to 150 trades.
For subscribers who have been without me throughout all of 2015, congratulations, and thank you for your tremendous support. For new subscribers who have joined throughout the year, welcome aboard, and get ready for an incredible 2016.
We have the luxury of positioning ourselves perfectly heading into the new year. I believe that it will be one of the most volatile years ever, as there will be a number of developing stories that will likely come to fruition. This means that there will be tremendous opportunities based on either a breakout to new all-time highs or a breakdown to multi-year lows. For the Nervous Nellies who might worry about a market that could sink 20%-30% next year, please don’t. Check out the track record from 2008 to see how we can make triple-digit profits in a sinking market.
The grind is always long, but it’s worth the effort, as the portfolio is on track to post another year of profits. I will talk more about what to expect in the coming weeks, but it’s time to relax and enjoy this week no matters what happens, as the technical picture will provide us with the clues we will need going forward.
From desk to press, futures look like this: Dow (-81); S&P 500 (-10); Nasdaq 100 (-15); Russell (-4).
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.
iRobot (IRBT, $36.09, down $0.40)
IRBT January 37 calls (IRBT160115C00037000, $0.60, down $0.21)
Entry Price: $0.65 (12/22/2015)
Exit Target: $1.30
Stop Target: None
IRBT March 40 calls (IRBT160318C00040000, $1.09, down $0.16)
Entry Price: $1.05 (12/22/2015)
Exit Target: $2.10
Stop Target: None
Action: A “triple-top” breakout occurred in late November on the solid move above $32. The 3-year chart shows near-term resistance at $40 if shares can clear $38.
The 52-week high is at $37.71. Support is at $36-$35.50. A close below $35 would ruin the momentum and likely force us out of the trades.
General Electric (GE, $30.83, down $0.12)
GE January 31 calls (GE160115C00031000, $0.37, down $0.10)
Entry Price: $0.47 (12/16/2015)
Exit Target: $1.00
Stop Target: None
GE February 32 calls (GE160219C00032000, $0.34, down $0.04)
Entry Price: $0.40 (12/16/2015)
Exit Target: $0.80
Stop Target: None
Action: Resistance is at $31 and the 52-week high of $31.23. Support is at $30-$29.50 and the 50-day moving average. Fund managers may be buying shares into the end of the year to show GE is on their books. The stock yields 3%, and a move past $31.25 could lead to a breakout to $32-$33.
You can read my detailed write-up on GE in the Dec. 17 Pre-Market Update.
Intel (INTC, $34.98, down $0.02)
INTC January 36 calls (INTC160115C00036000, $0.42, up $0.02)
Entry Price: $0.60 (12/9/2015)
Exit Target: $1.20
Stop Target: None
Action: Resistance is at $35.25-$35.50. Support is at $34.50, followed by $34 and the 50-day moving average.
You can read more about my thoughts on INTC in the Dec. 10 Pre-Market Update.
Medtronic (MDT, $77.63, down $0.02)
MDT January 80 calls (MDT160115C00080000, $0.41, up $0.07)
Entry Price: $0.72 (12/8/2015)
Exit Target: $1.45
Stop Target: None
Action: Resistance is at $78, followed by $79.50 and the 52-week high. Our breakeven point, technically, is $80.72 by mid-January. I would like to see a close above $78 today. Support is at $76-$75.50 and the 50-day moving average.
You can read my detailed write-up on MDT in the Dec. 2 Mid-Market Update.
Trades on Hold — other 2015 Portfolio Open positions (4): 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 — If shares fail to clear $36 by today’s Mid-Market Update, I will likely close the trade to save the remaining premium. The major moving averages are still in a downtrend, and there is resistance up to $40-$41 — Continue to hold.
Corning (GLW) January 20 calls — Resistance is at $19-$19.25 and the 200-day moving average. Support is at $18.25 and the 50-day moving average. A close below this level will likely force us out of the trade — Continue to hold.
MGM Resorts International (MGM) January 25 calls — Shares are holding their 50-day moving average. We will need a close above $23.50-$24 by Wednesday to possibly keep this trade open going into 2016 — Continue to hold.
SPDR Gold Shares (GLD) January 95 puts — I would like to see a close below $102 by Tuesday. If not, I will likely exit the trade to save the remaining premium — Continue to hold.
Editor and Chief Options Strategist