In This Issue:
Dear Momentum Options Subscriber,
It’s not often that the last trading day of the year ends up holding the fate for some of the major indices, but it did in 2015. The bulls had a slight grip on the S&P 500 heading into last Thursday’s open, but that failed to hold following a nasty open.
The bears took advantage of that nervousness to keep the Dow underwater after securing the small-caps in the red in mid-December. Tech was the only bright spot for 2015, but the Nasdaq left the year limping, with volatility picking up steam.
Needless to say, the first few weeks of January promise to be exciting, as the economic outlook is weakening, and fourth-quarter earnings are right around the corner.
On Thursday, the Dow dropped 178 points, or 1%, to settle at 17,425. The blue-chips struggled throughout the session, with the bears pushing a low of 17,421 ahead of the final bell. Support at 17,400-17,350 held, but the close below the 200-day moving average was a bearish development. There is further risk to 17,200-17,150 and the 100-day moving average on continued weakness. Resistance is at 17,600 and the 50-day moving average.
The S&P 500 sank 19 points, or 0.9%, to finish just below 2,044. The index opened at 2,060, which was below its 200-day moving average on Thursday. This was a bearish sign, but support at 2,040 held despite the close at session lows. There is wiggle room to 2,035, but a move below this level gets 2,025-2,020 and the 100-day moving average in play. Resistance is at 2,060-2,065 and the 50-day moving average.
The Nasdaq tanked 58 points, or 1.2%, to close at 5,007. The tech index also bottomed into the closing bell but held support at 5,000-4,975 and the 200-day moving average. A move below the latter gets 4,950-4,925 and the 100-day moving average in the mix. Short-term resistance is at 5,050 and the 50-day moving average.
The Russell 2000 sank 13 points, or 1.2%, to end at 1,135. The small-caps were a train wreck following the open at 1,149. The failed attempts to clear major resistance at 1,160-1,165 and the 50- and 100-day moving averages on Tuesday and Wednesday were omens that lower lows might come into play. Support at the lower end of 1,140-1,135 held, but there is risk to 1,125-1,120 on a weak open this morning. Resistance is at 1,145-1,150.
The S&P 500 Volatility Index ($VIX, 18.21, up 0.92) gained 5% to close back above the 17.50 level. There is continued risk to 19-20 and the 100-day moving average, with a move above the latter being a very bearish development. Short-term support is at 17-16.50 and the 50- and 200-day moving averages. I mentioned throughout December that it would be hard to trust any rallies until the bulls pushed the VIX back below 15 and held this level for several sessions.
The Dow fell 295 points, or 1.5%, in December, and it was down 398 points, or 1.1%, for 2015. The S&P 500 slipped 35 points last month, or 1.6%, and it bowed out the year with a loss of 14 points, or 0.5%.
The Nasdaq declined 101 points, or 1.9%, in December, but it finished 2015 with a gain of 271 points, or 7%. The Russell 2000 tumbled 62 points, or 5.2%, last month, and it closed out the year with nearly a 69-point, or 4.5%, pullback.
The trading ranges from mid-October are still in play, and they were the major reason why I didn’t want to come into the new year overloaded with fresh positions. I talked about the possible development of continued trading ranges in November and, in the Dec. 7 Pre-Market Update, I outlined those ranges.
I have since updated the charts to show the action during the past three months. The trading ranges were stretched on the mid-December lows, which is when Wall Street threw in the towel for the year. The whipsaw action afterward may have been the final flush of frustration before a mini Santa Claus rally, but that has yet to be determined.
The Dow reached a peak of 17,977 in early November and has since made lower highs while consolidating within an 800-point trading range between 17,200 and 18,000 since mid-October. The mid-December low on the Dow reached 17,128. I predicted that a “golden cross” would form on the Dow’s chart in December, as the 50-day moving average did clear the 200-day moving average. Although this is usually a bullish sign, all of the major moving averages are flattening out and appear to be in the process of starting to move lower.
I will be tracking the SPDR Dow Jones Industrial Average ETF (DIA, $173.99, down $1.81), while possibly playing February options on a move above Dow 17,900-18,000 or a move below Dow 17,200-17,100 this month.
The S&P 500 traded to a high of 2,116 in early November and has also proceeded to make lower highs over the past two months. The mid-December low touched 1,993, with a golden cross forming on its chart a few days later. The S&P 500 has been in an 80-point range between 2,020 and 2,100 since mid-October that was stretched on the mid-December pullback. The 100- and 200-day moving averages have been descending since late November, and the 50-day moving average is starting to roll over.
Bearish traders could zone in on the SPDR S&P 500 ETF (SPY, $203.87, down $2.06) February 190 puts (SPY160219P00190000, $1.60, up $0.30) if the index falls below 2,025-2,020 or if SPY shares fall below $202. These options traded more than 2,000 contacts last Thursday, as some traders bought protection on New Year’s Eve.
Bullish traders could target the SPY February 210 calls (SPY160219C00210000, $1.77, down $0.69) if the S&P 500 regains the 2,070 level for another possible run at 2,100. These options were active last Thursday, as over 5,000 contracts traded hands.
The Nasdaq made a run to 5,176 by early December but struggled afterwards with a lower low and lower high. The index bottomed at 4,871 mid-month and has traded in a 250-point range of 4,900-5,150 following the gap above the 5,000 level in mid-October. The 50-day moving average had been in a solid uptrend since then, but it leveled out last week. The 100- and 200-day moving averages seem to have peaked and are showing signs of drifting lower.
The Nasdaq has 50-60 points of downside risk to start the week, and I would target a move below 4,950-4,925 when looking to go “short.” The PowerShares QQQ Trust ETF (QQQ, $111.86, down $1.41) could be used to play a possible breakdown in tech. I will likely target the QQQ February 105 puts (QQQ160219P00105000, $1.12, up $0.24) if the QQQs fall below $110 or if the Nasdaq falls below 4,925.
If the QQQs bounce back this week and clear $112.75-$113 and the 50-day moving average, I will target the QQQ February 115 calls (QQQ160219C00115000, $1.45, down $0.60) to play another run towards $115 and possible all-time highs.
The Russell 2000 peaked at 1,205 in early December and was dragged lower mainly by the rising dollar. The selloff to 1,108 by the middle of the month represented an 8% pullback in just two weeks. I talked earlier about the bulls’ failure to clear the 50- and 100-day moving averages last week, and the sloping technical outlook looks bearish. The 200-day moving average has been in a steady decline since peaking in early August.
The small-caps have been flirting with a 60-point range between 1,200-1,140 since early October, which is why Thursday’s close below the latter need to be watched carefully. There is 4%-5% downside risk to the 1,100-1,075 level on continued weakness. A close below the October low of 1,078 could signal a pending market correction.
The Monday/Friday closes continue to be mixed, and this often is the case during trading ranges. The Dow closed lower last Monday to snap a two-win streak, but it has closed lower on four of the past six Mondays. This is a slightly bearish sign.
The market has been closed the prior two Fridays, but the Dow closed lower in the past two Thursday sessions. The previous two Fridays in December were also negative Dow closes, and the blue-chips have closed lower on five of the past eight Fridays. This follows a strong late-September and October run during which the index finished higher for five-straight weeks.
I have been mentioning the possible Santa Claus rally, which is supposed to occur during the last five trading days of the past year and the first two sessions of the new year. The Nasdaq needs to make up 35 points, or less than 1%, to get back to even before it can get a gift from Santa. The Russell 2000 is down 17 points, or 1.5%, and needs to be super good over the next two sessions to possibly get a bullish present.
While there appears to be further downside risk and a slumping technical outlook, trading ranges can be maddening. I have also pointed out in my detailed chart work several possible “symmetrical” triangles that appear to be forming. These technical patterns often precede major market moves, but they can take a little time to play out.
With fourth-quarter earnings starting next week and geopolitical news continuing to unfold throughout January, a possible 5%-10% move from current levels is a strong possibility for the major indices this month. The aforementioned trading ranges, along with the VIX, should offer excellent clues as to how the month will play out, so stay focused and relaxed. We just have to wait for the action to come to us.
From desk to press, futures look like this: Dow (-287); S&P 500 (-33); Nasdaq 100 (-88); Russell (-20).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 102-51-2 (66%). 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.
Sony (SNE, $24.61, down $0.11)
SNE February 24 puts (SNE160219P00024000, $0.90, up $0.10)
Entry Price: $0.85 (12/28/2015)
Exit Target: $1.70
Stop Target: None
Action: Support is at $24-$23.50. A close below the latter could lead to a retest of the low $20s. Resistance is at $25-$25.50.
Shares have been in a severe downtrend since peaking at $29 in late October/early November, and the major moving averages are in a major downtrend as well. The 50- and 100-day moving averages are sloping lower, with the 200-day moving average picking up downside momentum.
The 2016 Consumer Electronics Show (CES), which is taking place this week in Las Vegas, could help tech, as a number of key companies will likely be releasing new products. However, there could be some slight headline risk with Sony and its highly anticipated virtual-reality products that are soon to be released. If that turns out to be the case, I’m looking for resistance to hold.
General Electric (GE, $31.15, up $0.10)
GE February 32 calls (GE160219C00032000, $0.41, up $0.04)
Entry Price: $0.40 (12/16/2015)
Exit Target: $0.80
Stop Target: None
Action: Shares traded to a 52-week high of $31.49 last Thursday and held a slight gain into the close. Resistance is at $31.50-$32. Support is at $31-$30.50. A close below $30 and the 50-day moving average would be a bearish development.
You can read my detailed write-up on GE in the Dec. 17 Pre-Market Update.
Editor and Chief Options Strategist