Dear Momentum Options Subscriber,
The bulls rebounded on Monday to slow the bears’ momentum following another volatile day on Wall Street. The push to lower lows to start the week was another bearish sign, but the market showed a bit of resiliency throughout the session to keep the bullish hope alive. The weakness in tech and the small-caps remains a concern, but both held their key levels of support.
The Dow gained 52 points, or 0.3%, to end at 16,398. The blue-chips made a push past resistance at 16,350-16,400 after reaching a peak of 16,461 on the open. The close between these levels keeps upper resistance at 16,600 in play. The mid-day low touched 16,232, with support at 16,200-16,000 holding. A “death cross” is in the processing of forming, as the 50-day moving average is 29 points away from falling below the 200-day moving average.
The S&P 500 climbed a point, or 0.1%, to finish at 1,923. The index reached a peak of 1,935 shortly after the opening bell, but resistance at 1,935-1,940 held. The intraday fade to 1,901 tested backup support at 1,900, and there is risk to 1,875 if that level is breached. The 50-day moving average officially closed below the 200-day moving average on Monday.
The Nasdaq fell 5 points, or 0.1%, to settle at 4,638. Tech made a run to 4,683 on the opening hoopla, but it failed to hold resistance at 4,675-4,700. The late-day tumble to 4,573 and intraday drop below 4,600 keeps crucial support at 4,550-4,500 in play. Yesterday was the eighth-straight session the index has closed in the red.
The Russell 2000 fell 4 points, or 0.4%, to close at 1,041. The small-caps tested resistance at 1,050-1,060, but they struggled for much of the session afterwards. The index set another fresh 52-week low of 1,031 late in the day, but it held the 1,040 level into the close. Backup support is at 1,030-1,025, and a move below the latter will likely get the bearish ball rolling again.
The S&P 500 Volatility Index ($VIX, 24.30, down 2.71) sank 10% and stayed subdued throughout much of the session. The bears did make an attempt to clear resistance at 27.50 late in the session, but they fell shy following a growl to 27.39. The drop to 23.83 ahead of the closing bell failed at support at 23.50-22.50. The close below 25 was slightly bullish.
I have a number of trade updates this morning, including charts and commentary, and I also have a Profit Alert, as the Stop Limit on our trade in Citigroup (C) was triggered late in yesterday’s session.
From desk to press, futures look like this: Dow (+171); S&P 500 (+21); Nasdaq 100 (+54); Russell (+8).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 4-0 (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, $46.85, up $0.72)
C February 45 puts (C160219P00045000, $1.20, down $0.30)
Entry Price: $1.10 (1/8/2016)
Exit Target: $2.20
Stop Target: $1.25 (Stop Limit)
Action: The Stop Limit of $1.25 was triggered late in the day following C’s run to $47 into the close. I will keep shares on my watch list for another possible trade, as I still believe there is further weakness in the name.
Earnings are due out ahead of Friday’s open. The suits-and-ties are expecting a profit of $1.12 a share on revenue of $17.87 billion. Citigroup has topped estimates during the past three quarters by $0.07, $0.17 and $0.12, respectively, but it missed by $0.03 in the year-ago period. Revenue has also come in higher for two-straight quarters, but it missed expectations during the two prior quarters.
Given the hit-and-miss forecasts, it’s hard to say how shares will react to the news, which is why earnings trades are so tricky. Forward guidance will likely dictate if lower lows or higher highs come into play.
The technical picture is a little clearer, as the major moving averages are in a sloping downward trend. Shares tested a fresh 52-week low of $45.93 intraday before the strong reversal into Monday’s closing bell.
Bearish traders could keep these options on their watch lists if shares weaken going into the announcement. Another move below $46 ahead of Thursday’s close might be a golden clue that shares could be headed lower.
Bullish traders could target the C February 50 calls (C160219C00050000, $0.75, up $0.05) if shares are showing continued momentum ahead of the announcement for a possible push past $50. This would require a 3% move from current levels. These options would return 100% or more if shares trade past $51.50, technically, by mid-February.
If you want some lotto action, the C January 48 calls (C160115C00048000, $0.60, up $0.10) could be targeted if PowerBall isn’t your game. These options would double if shares trade past $49.20, technically, ahead of this Friday’s close.
These options are more of a gamble, as they expire in four days, which is why they are a much riskier bet than the bullish February call options. While I’m interested in another possible longer-term play on Citigroup, I would rather spend a few bucks on a lottery ticket to win the $1.5 billion jackpot than risk trading the January options.
Garmin (GRMN, $33.20, down $0.35)
GRMN February 30 puts (GRMN160219P00030000, $0.70, up $0.07)
Entry Price: $0.70 (1/11/2016)
Exit Target: $1.40
Stop Target: None
Action: I wanted to get back into GRMN puts, as I mentioned that I expect continued weakness in this name.
A close below shaky support at $33 should set up a continued backtest to $30. The mid-October 52-week low reached $30.89. Resistance is at $34-$34.50. Yesterday’s high touched $33.98.
The dividend yield for Garmin is now over 6%, and that could start to attract bullish investors. However, if the company announces a lousy quarter or new sales sputter, the company could cut the yearly payout, which is currently just north of $2 a share.
Here is an updated version of my original write-up on GRMN from the Jan 8. Pre-Market Update:
Shares fell from $36.96 to close at $32.28 on the October low after the company cut guidance for the second time in four months. A few weeks later, the company reported a profit of $0.51 a share versus estimates for $0.55 a share. Revenue came in at $680 million versus forecasts for a reading north of $687 million.
Wall Street is expecting earnings of $0.47 a share on revenue of $759 million when Garmin reports its numbers again in mid-February.
The success or failure of the newly released Forerunner 230/630 watches isn’t a game-changer in an already crowded field for wearables. More importantly, Garmin’s new watch doesn’t include heart-rate monitoring, which is one reason why there has been a sudden boom in wearables.
I’m not sure if Garmin will cut guidance again ahead of its fourth-quarter earnings release, but, if it does, shares will likely tumble on the news. If they stay mum, there is still a good chance the company will miss estimates for at least the fifth-straight quarter.
Garmin has missed earnings by $0.04, $0.06, $0.02 and $0.01, respectively, over the past four quarters. This is never a good sign for a sustained higher stock price, and often it leads to fresh 52-week lows if earnings continue to fall shy of expectations.
Considering these factors, including the juicy dividend that could get slashed, I still love the risk/reward for put options in GRMN.
General Motors (GM, $30.25, up $0.72)
GM February 28 puts (GM160219P00028000, $0.60, down $0.30)
Entry Price: $0.69 (1/11/2016)
Exit Target: $1.30
Stop Target: None
Action: Resistance is at $31, but there is risk to $32-$33 if that level is breached. Shaky support is at $30-$29.50. A move below $29 could possibly lead to another backtest to the mid-$20s.
These options traded over 2,600 contracts on Friday, and last week’s break below the 200-day moving average was a bearish development. GM’s numbers are due to be released in early February, and I will cover my outlook for its next report in the coming days.
Emerson Electric (EMR, $43.80, down $0.30)
EMR February 44 puts (EMR160219P00044000, $2.10, up $0.10)
Entry Price: $1.20 (1/6/2016)
Exit Target: $3.00 (closed first half at $1.80 on 1/7/16)
Stop Target: $1.70, Raise to $1.80 (Stop Limit)
Action: Raise the Stop Limit from $1.70 to $1.80.
Yesterday’s low kissed $43.25. Support is at $43-$42.50. The October low reached $41.79. Resistance is at $44-$44.50.
You can read my detailed write-up on EMR in the Jan. 7 Pre-Market Update.
Wal-Mart Stores (WMT, $64.22, up $0.68)
WMT February 60 puts (WMT160219P00060000, $0.62, down $0.16)
Entry Price: $0.73 (1/11/2016)
Exit Target: $1.45
Stop Target: None
Action: Resistance is at $65, but there is risk to $67-$68 on a move above this level. Near-term support is at $63-$62.
Shares have made a strong move out of a mini trading range that lasted from mid-November through mid-December. The break out of the $58-$61 range led to a nice surge north of $65 last week. The rally happened over a 12-session run, and I’m looking for a backtest to $61.50-$60 and the 100-day moving average over the near term. A move below $59.75 could lead to a possible drop into the mid-$50s.
The technical picture for WMT is somewhat bullish, with the 50-day moving average staying in a strong uptrend since late December. However, the company has missed Wall Street’s estimates in two of the past four quarters. Current estimates are pegged at $1.46 a share on revenue north of $131 billion. These options expire a day before the earnings announcement, and I hope to be out of this trade with a nice profit ahead of the news.
Nike (NKE, $59.55, up $0.68)
NKE February 55 puts (NKE160219P00055000, $0.67, down $0.28)
Entry Price: $0.77 (1/11/2016)
Exit Target: $1.50
Stop Target: None
Action: Near-term resistance is at $60, followed by $61.75-$62. Support is at $58.
Last week’s move back below $62-$61.75 and the 200-day moving average could possibly lead to a test to $57.25-$57 and the 100-day moving average. A close below $56 could lead to another backtest to the low $50s.
Shares recently split 2-for-1 this past Christmas Eve from a prior closing price of $128.71 the day before. This has made the premiums on NKE much cheaper, and I will likely trade options against the stock throughout 2016.
Mylan (MYL, $49.50, up $0.08)
MYL February 47.50 puts (MYL160219P00047500, $1.65, down $0.02)
Entry Price: $0.96 (1/7/2016)
Exit Target: $2.00
Stop Target: $1.55 (Stop Limit)
Action: The Stop Limit at $1.55 held into the close, but it will likely trigger if shares clear $50 again. Monday’s high reached $50.23.
Support is at $49-$48.50. Resistance is at $50-$50.50.
Trades on Hold — other 2015 Portfolio Open positions (2): 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.
3D Systems (DDD) February 11 calls — Continue to hold.
Editor and Chief Options Strategist