In This Issue:
Dear Momentum Options Subscriber,
The start of 2016 greeted traders with a bearish thunder, as the market suffered its most volatile week in the history of Wall Street. The selling pressure was extended into Friday’s closing bell, with the bears pushing fresh lows. Volatility also spiked, and it is approaching the late-summer highs from last year.
I often mention that the bulls like to take the stairs to higher highs in a rising market. Meanwhile, the bears prefer elevator drops to lower lows. Fourth-quarter earnings season starts this week, and there will also be plenty of economic news. Geopolitical and political rhetoric are also heating up. These will be the main catalysts that determine whether the August lows hold or if a rebound is in store for the major indices.
The Dow tumbled 167 points, or 1%, to close at 16,346 on Friday. The blue-chips moved up to 16,651 on the opening rally but traded into negative territory ahead of Wall Street’s lunch break. This was a good clue that lower lows would come into play. The bears breached support at 16,400-16,350 on the late-session low of 16,314. I mentioned that there was risk to 16,200-16,000 on a close below these levels. If 16,000 fails to hold, additional panic-selling will likely occur. Resistance is now at 16,600-16,700.
The S&P 500 stumbled 21 points, or 1.1%, to end at 1,922. The index pushed 1,960 shortly after the open before sinking to a low of 1,918 ahead of the closing bell. The move into the 1,925-1,920 range slightly held support, but 1,900-1,875 is in play if 1,915 triggers. Resistance is at 1,935-1,940, which are levels the bulls need to clear ahead of today’s close.
The Nasdaq gave back 45 points, or 1%, to finish at 4,643. The tech index made a run to 4,742 on the opening pop before folding like a cheap lawn chair to 4,637 ahead of Friday’s close. The next levels of support are at 4,550-4,500. Fresh resistance is at 4,700-4,725.
The Russell 2000 fell 18 points, or 1.7%, to settle at 1,046. The small-caps tested prior resistance at 1,075 following the opening push to 1,072, but the Russell was the first of the major indices to give up its opening gains. This was another good clue that Friday’s rally would fade and turn worse. The fresh 52-week low opens risk to 1,025-1,000. Resistance is standing tall at 1,050-1,060.
The S&P 500 Volatility Index ($VIX, 27.01, up 2.02) jumped 8% after testing a low of 22.48. The bulls’ inability to hold 22.50-23.50 was also a warning that things might get ugly. The close above 25, which is a level the bulls must quickly recover, was a very bearish development. I’m looking for 30-35 to hold over the near-term, but there is serious risk of a spike to 50 if these levels are breached.
I often refer to the historical trading patterns of the stock market before the talking heads do and, needless to say, Santa failed to cheer up Wall Street for the second-straight year. This fact was lost during the mayhem, but it didn’t matter. The historical “January Effect” has also been busted, and the odds of a bearish year have greatly increased. Thursday’s headline for the update read “Technical Outlook Worsens.”
While these anecdotes are great fodder, I relied more on last Monday’s chart work and the VIX to determine the market’s next major move. The “symmetrical triangle” patterns indicated that a major market move was forthcoming, and the exhausting work I did over the holidays certainly paid off. The three-month trading range was finally cracked, and I talked about a possible 4%-5% market pullback.
Trading ranges can be boring, but, once they fail or succeed, a major breakout or breakdown always ensues. We just had to be patient. For those who have stayed the course and waited for the technical clues to play out, then you were well prepared for last week’s pullback. For new subscribers, don’t get nervous like the “suits-and-ties” are.
Today’s clever headline was in response to shares of Twitter (TWTR, $19.98, down $0.28) falling to a fresh all-time low of $19.60 on Friday. Of course, shares have only been publicly traded for a little more than two years, but Friday’s drop into the high-teens was a significant development.
I have always said that Twitter shares deserve a “premium” based on the company’s ability to reach tens of millions of people in seconds. Although not all late breaking news on Twitter can be trusted, many of the stories are newsworthy, which is why shares look “cheap” at current levels.
Look, nobody likes trying to catch a falling knife, but knowing when there is blood on the street is a different story. However, just because Twitter shares are at fresh all-time lows doesn’t mean they can’t go lower. With a market cap now under $14 billion, a major tech company will likely step up to the plate, especially if shares fall to the mid-teens.
Toss away fundamentals, and let’s look at a pure cash play for Twitter. At a 50% takeout premium, a buyout offer at $30 a share would cost Apple (APPL, $96.96, up $0.51) just over $27 billion at current levels. Apple currently has over $200 billion in its cash coffers.
Apple CEO Tim Cook could sneeze at paying 10% of the company’s cash coffers to own Twitter. In the “old days,” or pre-internet bubble, takeout premiums were usually 100% of a stock’s price, so a 50% premium is a steal nowadays.
Twitter is expected to earn $710 million in its recently ended quarter. A $27 billion tab would be paid off in less than 10 years at current levels. Any increases or decreases in Twitter’s $2.5 to $3 billion a year in revenue would make the payoff either come quicker or take longer.
The risk/reward for an Apple/Twitter marriage is a no-brainer, but this takeover may or may not ever happen. Apple could probably easily fix Twitter’s platform problems within a month and could turn Twitter into its own newsfeed.
In the meantime, the TWTR February 18 puts (TWTR160219P00018000, $1.03, up $0.04) look “tempting” at current levels to play continued short-term weakness in the stock.
Bearish traders could buy these puts at current levels if they expect a drop in TWTR shares to the mid-teens. If shares are below $16 by mid-February, technically, these options will easily return triple-digits from current levels.
The TWTR February 16 puts (TWTR160219P00016000, $0.51, up $0.06) also look like a tease, but these put options are nearly $4 “out of the money.” If shares of Twitter are below $15 come mid-February, this trade would also represent a return of 100% or more from current levels. However, this would require another 25% drop in TWTR shares from current levels in just over five weeks.
On the other hand, bullish traders could “sell to open” the TWTR February 16 puts and collect the $0.50 in premium, or $50 for every contract sold. If these puts expire worthless, then you could keep 100% of the premium and the trade is complete.
However, the “risk” is that writing a naked put like is that it would require the seller of the option to buy 100 shares of Twitter common stock at $16, if shares are below this level by mid-February. To sell to open 1 contract of this trade would require you to have $1,600 in your brokerage account, and you have to be approved to sell, or short, naked puts. If assigned, the cost of the position would be lowered to $1,550. You could then continue to write covered calls or sell additional TWTR puts at lower levels to build a larger position.
As far as the outlook on the market, I update the 10-year charts from time to time throughout the year, and February is usually when I make my year-end targets for the major indices. Prior to last year, my forecasts for the market were very accurate for three-straight years. I mentioned in the Feb. 23, 2015, Pre-Market Update that it would depend on how the technical picture played out throughout last year.
I predicted Nasdaq 5,000 way before any of the talking heads knew it was coming, with the index trading to an all-time high of 5,231.94 in 2015.
The 10-year charts from last February showed that it would be a bearish development if the indices fell below major support. At the time, those downside targets were: Dow (17,000), S&P 500 (2,000); Nasdaq (4,500) and Russell (2,000-1,150).
Here is the chart along with my comments at the time:
“It is imperative that the bottom 10-year uptrend lines hold for these targets to be achieved. If not, the market could see a nasty freefall that will absolutely scare Wall Street and Main Street. We can worry about this when the time comes, but, for now, let’s cover the upside potential. ”
The Nasdaq plunged to an intraday low of 4,292 on the Aug. 24 selloff before closing above the 4,500 level at 4,526. The next day, the index tested a low of 4,506 before clearing 4,700 two sessions later. The bears’ failure to hold 4,500 on the mini “flash crash” then was also a good clue that the market could rally again while staying within a trading range. We witnessed this in October. Now, here we are again with the bulls walking the plank.
Needless to say, I likely won’t turn fully bearish until the bears can clear and hold the 4,500 level on multiple closes. Otherwise, a mixture of call and put options, or writing and possibly selling covered calls on stocks you own, remain my main strategies.
The current action feels much like last September, so it’s not out of the question that a snap-back rally could ensue. However, the bulls will need a lot of good news throughout the week and a flood of buying to regain momentum.
With earnings season starting today and the heart of fourth-quarter updates lasting into the end of the month, the same scenario from August/September could play out. Then again, it might not, but at least we are well prepared.
It remains to be seen if lower lows or higher highs are ahead, but the likelihood of a lower trading range is very strong in the coming months. The Russell ended last week at a fresh 52-week low, and the October 2014 low touched 1,040.
I will talk more about possible lower downside targets in next Monday’s market overview after this week’s action plays out. However, it is clear that if the small-caps fall below 1,040-1,035 this week, the Russell 2000 could be trading with a 9-handle for the first time since June 2013.
I expect a busy week for possible trades, and I could get started right out of the gate on this morning’s open.
The Momentum Options portfolio has done well since mid-December. I often talk about how trading a trend is so much easier than trading a trading range, and hopefully the bears keep doing their thing. If not, I have placed protective Stop Limits on our current trades to protect profits.
We are in great shape either way. If there is a rebound, we will be closed out of our current profitable trades and be in a great position to possibly play call options. If there is continued weakness, I will look at additional put option positions along with fresh plays on individual stocks that could begin to crack under pressure.
I wanted to update the bearish index put option trades from last Monday’s Pre-Market Update once again, as the market pullback was a popular topic over the weekend.
I profiled the SPDR S&P 500 ETF (SPY, $191.92, down $2.13) as a way to “short” the S&P 500 if the index fell below 2,025-2,020 or SPY dropped below $202. SPY came into the week at $203.87 and tested a low of $191.58 on Friday. The SPY February 190 puts (SPY160219P00190000, $5.12, up $1.90) came into last week at $1.60 and reached a peak of $5.20 on Friday. Although this wasn’t an official trade for the portfolio, if you decided to enter the trade and got in under $2, lock in profits on half of the position this morning and set a stop at $4 to protect profits in case the index rebounds. Let the other half ride while setting higher Stop Limits to protect profits.
I also profiled the PowerShares QQQ Trust ETF (QQQ, $104.01, down $0.86) and the QQQ February 105 puts (QQQ160219P00105000, $4.00, up $0.40) at $1.12 last Monday morning. I said to get “short” or buy the puts if the QQQs failed at $110 or if the Nasdaq fell below 4,925. These puts tapped a high of $4.04. This wasn’t an official trade for the portfolio, but, if you decided to take this trade, close half today and set a stop at $3.25 to ensure a 200% profit.
From desk to press, futures look like this: Dow (+96); S&P 500 (+14); Nasdaq 100 (+26); Russell (+8).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 1-0 (100%). 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.
Citigroup (C, $46.13, down $1.43)
C February 45 puts (C160219P00045000, $1.60, up $0.52)
Entry Price: $1.10 (1/8/2016)
Exit Target: $2.20
Stop Target: $1.25 (Stop Limit)
Action: Set an initial Stop Limit at $1.25 to protect profits. I will raise it along the way if shares continue lower.
Shares closed below the August low of $47.06, and the 52-week low is at $46.60, which triggered last January. The 50- and 100-day moving averages are rolling over, and the 200-day moving average is in a slight decline. Support is at $46-$45 on continued weakness, and a close below the latter would make for a very bearish setup.
The three-year monthly chart shows near-term risk to low $40s if shares fail to hold $45.
Garmin (GRMN, $33.55, down $1.35)
GRMN February 32.50 puts (GRMN160219P00032500, $1.37, up $0.63)
Entry Price: $0.72 (1/7/2016)
Exit Target: $1.45, raise to $2.00
Stop Target: $1.10 (Stop Limit)
Action: Raise the Exit Target from $1.45 to $2.00.
Set an initial Stop Limit at $1.10 to protect profits. I will raise it along the way if shares continue lower.
Friday’s close below $34 was a beautiful development, and I talked about risk to the low $30s if $34 was breached. The mid-October 52-week low reached $30.89, and a move below $33 could be our bingo ticket for a massive return. Resistance is at $34.50-$35.
The GRMN February 30 puts (GRMN160219P00030000, $0.63, up $0.35) jumped 125% on Friday after opening at $0.36. I could use those options to “piggy-back” this trade if shares fall below $33.25-$33. If I add them, I will send out a New Trade Alert.
You can read my detailed write-up on GRMN in the Jan. 8 Pre-Market Update.
Mylan (MYL, $49.42, down $2.19)
MYL February 47.50 puts (MYL160219P00047500, $1.67, up $0.57)
Entry Price: $0.96 (1/7/2016)
Exit Target: $2.00
Stop Target: $1.35 (Stop Limit)
Action: Set an initial Stop Limit at $1.35 to protect profits. I will raise it along the way if shares continue lower.
The close below previous support (now resistance) at $51-$50.50 and the 50-day moving average was a big development for this trade. I talked about a possible backtest to $47.50-$45 if $50.25 failed to hold. A move below $49-$48.50 and the 100-day moving average should trigger additional selling pressure, which is where I would like to close at least half of the trade.
The MYL February 45 puts (MYL160219P00045000, $0.86, up $0.49) also look attractive if fresh support fails to hold. MYL also trades weekly options, so I could use them as well. If I add them, I will send out a New Trade Alert.
Emerson Electric (EMR, $44.10, down $0.51)
EMR February 44 puts (EMR160219P00044000, $2.00, up $0.15)
Entry Price: $1.20 (1/6/2016)
Exit Target: $2.40 (closed first half at $1.80 on 1/7/16)
Stop Target: $1.50, raise to $1.70 (Stop Limit)
Action: Raise the Stop Limit from $1.50 to $1.70 on the second half of the trade.
The close below $44.50 should get $43-$42.50 in play on continued weakness. The October low reached $41.79. Resistance is at $44.75-$45.
You can read my detailed write-up on EMR in the Jan. 7 Pre-Market Update.
3D Systems (DDD, $8.37, down $0.21)
DDD February 11 calls (DDD160219C00011000, $0.13, down $0.07)
Entry Price: $0.50 (1/4/2016)
Exit Target: $1.00
Stop Target: None
Action: Support is at $8 on continued weakness. Resistance is at $8.50. I still like this trade due to the high short-interest in the stock. With over a month of time premium still remaining, I still want to keep this and our other call position open. I’m placing this trade on “hold,” and it will appear in the “Trades on Hold” section of subsequent updates. We’ll see how the action plays out over the next few weeks.
You can read my detailed write-up on DDD in the Jan. 5 Pre-Market Update.
Kohl’s (KSS, $47.88 down $2.98)
KSS February 45 puts (KSS160219P00045000, $1.35, up $0.67)
Entry Price: $1.10 (1/4/2016)
Exit Target: $2.20
Stop Target: $1.15 (Stop Limit)
Action: Set an initial Stop Limit at $1.15 to protect profits. I will raise it along the way if shares continue lower.
These options gained 99% on Friday, which is why I want to protect profits on any pullback.
Support at $47.50 and the sloping 100-day moving average held on Friday’s freefall to $47.55. The rising 50-day moving average took a nasty hit, and a close below $46.50 would be a very bearish development. Resistance is at $49-$50.
Earnings aren’t due out until late February, so we don’t have to worry about the headline risk. However, I believe the company will miss earnings forecasts for $1.88 a share on revenue of $6.46 billion. Perhaps Kohl’s will issue a profit warning in the coming weeks, which would be great news for our bearish position.
I have also added the KSS February 42.50 puts (KSS160219P00042500, $0.79, up $0.44) to my Watch List for a possible “piggy-back” trade. If I add them, I will send out a New Trade Alert.
Trades on Hold — other 2015 Portfolio Open positions (1): 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.
General Electric (GE) February 32 calls — Continue to hold.
Editor and Chief Options Strategist