Dear Momentum Options Subscriber,
It felt like a Paul Simon week for the bulls as they struggled with resistance before totally collapsing to fresh 2016 lows on Friday. The August 2015 lows are now in play, and the bears will be looking for weak corporate earnings to keep their momentum.
The Dow dropped 391 points, or 2.4%, to end at 15,988 on Friday. The blue-chips tested a low of 15,842 intraday with backup support at 15,800 holding. The close below 16,000 was the first since August 25th. The Aug. 24 low reached 15,370 and will likely be tested if 15,800-15,600 fails to hold. Resistance is at 16,000-16,200 followed by 16,350-16,400.
The S&P 500 sank 41 points, or 2.2%, to finish at 1,880. The index traded down to 1,857 midday with backup support at 1,875-1,850 holding. The bears took out the previous late August low of 1,867 that triggered on back-to-back sessions. A breach of the 1,850 level could signal a continued slide to 1,825-1,800. Resistance is at 1,900 followed by 1,920-1,925.
The Nasdaq tanked 126 points, or 2.7%, to settle at 4,488. The tech index tumbled to a low of 4,419 shortly after Wall Street’s lunch break with support at 4,400 holding. There is risk to 4,300 if this level is breached this week. The Aug. 24 bottom reached 4,292. Resistance is at 4,500-4,525 followed by 4,550-4,600.
The Russell 2000 fell 18 points, or 1.8%, to close at 1,007. The small-caps traded down to 983 on Friday while setting another fresh 52-week low in the process. The bulls held 975 with risk to 960-950 on a close below this level. Resistance is at 1,020-1,025.
The S&P 500 Volatility Index ($VIX, 27.02, up 3.07) surged to a high of 30.95 intraday before closing below the 27.50 level. This was a slightly bullish sign, although there is still risk to 30-35. A move above the latter could lead to a test to 40-50 and the Aug. 24high of 53.29. Support is at 25 and a level the bulls to clear to start the week. The more crucial levels of support are at 23.50-22.50.
While market pundits like to say last week’s continued pullback can be blamed on the 12-year lows in oil, the Transports have been a drag on the overall market for two months.
My commentary from Dec. 28:
“The Dow Jones Transportation Average ($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 50/100-day moving averages. A close below 7,400-7,350 would be a very bearish development going forward.”
The chart below shows the Dow Jones Transportation Average ($TRAN, 6,689, down 110) broke below these key levels of support to start the year. The index has now dropped more than 1,000 points since late December with Friday’s low reaching 6,560. Resistance is at 6,800-7,000
While there could be a short-term rebound, the major moving averages are still in a downtrend and are picking up steam. This technical damage will take a long time to reverse and why any rallies can’t be trusted until 8,000 is cleared. This would require a move back above the 50- and 100-day moving averages.
The 3-year chart shows risk to 6,500 with risk to 6,250-6,000 over the near-term, or, at some point this year.
Shares of United Parcel Service (UPS, $90.04, down $1.11) have also suffered on the pullback in the Transports. The chart shows the recent pullback from $105 to $90 with a death cross in the process of forming. Shares traded to a 52-week low of $88.42 last Friday before holding support at $90. Short-term resistance is at $92-$93.
I could add UPS put options on continued closes below $90. The 3-year chart shows risk to $87.50-$85 if support fails to hold. To capitalize on continued weakness, bearish traders can target the UPS February 85 puts (UPS160219P00085000, $1.65, up $0.35) if shares fail to hold $88.25-$88.
The Financial Select Sector SPDR ETF (XLF, $21.42, down $0.49) has been battered since the start of the year and continue to show weakness. Friday’s low touched $21.13 with shaky support at $21-$20. The late August low reached $18.52. A death cross formed last week with the 50-day moving average falling below the 200-day moving average. Resistance is at $22.
The XLF February 21 puts (XLF160219P00021000, $0.58, up $0.13) traded more than 18,000 contracts on Friday and can be targeted by bearish traders if XLF falls below $21.25-$21 this week.
Bullish traders can target the XLF February 22 calls (XLF160219C00022000, $0.48, down $0.12) on a move past $22 for a short-term countertrend trade.
Gold ($GOLD, $1,088.60 up $10.30) had a good start to the New Year but pulled back last week. The rush to gold was a given, following the 5% market pullback to begin 2016, but more importantly, resistance at $1,100 held strong. Although this level was stretched to $1,110, the major moving averages are still in a downtrend and it’s why I refuse to jump on the bandwagon.
The 100-day moving average held on the backtest, and another drop below $1,075 and the 50-day moving average would negate this year’s momentum. If gold falls below $1,050 on a continued pullback, I would expect the plunge below $1,000 to occur on a “triple-bottom” breakdown. I have predicted gold could test $900-$800 at some point in 2016 and this is why I would avoid buying physical gold at this point.
To profit on the move below $1,050, and possibly to $1,000 or worse, in the price of gold, I continue to monitor the action in the SPDR Gold Trust Shares ETF (GLD, $104.08, up $1.06). Shares mirror the action in gold and have the same technical action that I just covered.
I have been waiting for GLD to fall below $100 before loading up on possible put options. There are a few bearish plays I might nibble on if $103.50 fails while waiting for $102-$100 to trigger.
The GLD February 100 puts (GLD160219P00100000, $0.65, down $0.20) look attractive on continued weakness and on a move below $103.50 in the stock. The options have a month before they expire and would double if GLD falls below $98.70 by mid-February.
The GLD March 96 puts (GLD160318P00096000, $0.55, up $0.15) would give a bearish trade an additional month to play out. The breakeven point would require GLD shares to be below $95.45 by mid-March. The puts would return 100+% if GLD falls below $94.90 by March 18.
The Dow dropped 1,079 points the first week of 2016 and another 358 points last week. The 1,437 point pounding, or 8%, pullback has put the index in correction mode. The blue-chips are down from a 52-week peak of 18,351 and at current levels represent a 2,363 point shellacking, or 13%.
While the longer-term outlook looks extremely bearish, a short-term rebound could be in store.
From desk to press, futures look like this: Dow (+238); S&P 500 (+28); Nasdaq 100 (+65.75); Russell (+11).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 8-0 (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.
Intel (INTC, $29.76, down $2.98)
INTC February 30 puts (INTC160219P00030000, $1.35, up $0.90)
Entry Price: $0.60 (1/13/2016)
Exit Target: $1.80 (Closed first half at $1.20 on 1/15/16)
Stop Target: Raise from $0.95 to $1.20 (Stop Limit)
Action: Raise the Stop Limit from $0.95 to $1.20.
I raised the Exit Target to $1.80 on Friday and it’s where I would like to close the other half of the trade. However, I could raise it, which is why there isn’t a Limit Order listed for the Exit Target. I raised the Stop Limit this morning to protect profits and to ensure a triple-digit winner.
Friday’s low touched $29.45. Support for INTC shares is at $29-$28 and it’s where I would like to close the other half of the trade. However, a close below $28 could get the mid $20s and August lows in play. This is why I haven’t made the $1.80 Exit Target a limit order. Short-term resistance is at $31-$31.50 and the 200-day moving average.
General Motors (GM, $29.57, down $0.73)
GM February 28 puts (GM160219P00028000, $0.75, up $0.21)
Entry Price: $0.69 (1/11/2016)
Exit Target: $1.30 (Closed first half at $1.00 on 1/15/16)
Stop Target: $0.60 (Stop Limit)
Action: Set a Stop Limit at $0.60 on the other half of the trade.
Support is at $29-$28, with a close below the latter possibly leading to a test to the August lows. Friday’s low touched $28.80. Resistance at $30-$31. I didn’t like the gains the puts gave up into Friday’s clos,e and we are guaranteed a double-digit profit if shares rebound.
You can read my detailed write-up on GM in the Jan. 12 Pre-Market Update.
Nike (NKE, $57.56, down $0.95)
NKE February 55 puts (NKE160219P00055000, $1.09, up $0.32)
Entry Price: $0.77 (1/11/2016)
Exit Target: $1.50
Stop Target: $0.85 (Stop Limit)
Action: Set a Stop Limit at $0.85.
Friday’s low for NKE reached $56.59, with the puts tapping a high of $1.27. Support is at $56.50-$56. Resistance is at $58.50-$59.
Shares held the 200-day moving average on Friday’s pullback. There is risk to the low $50s if NKE fails to hold $56 and it’s a level where I could add additional put options.
You can read my detailed write-up on NKE in the Jan. 12 Pre-Market Update.
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 — If shares fall below $27 and the 200-day moving average, I will likely exit the trade. Otherwise, continue to hold.
3D Systems (DDD) February 11 calls — Resistance is at $8. Continue to hold.
Editor and Chief Options Strategist