In This Issue:

Dear Momentum Stocks Weekly 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 Stocks Weekly Play List

All prices given in this update are current as of Jan. 15, 2016. I hereby disclose that I will be participating in the following trade(s).

The Momentum Stocks Weekly Closed Trade Track Record is 0-0, for a 0% win rate for 2016 (144-26, or 85% win rate, overall since the start of 2011).

View the entire list of open and closed trades by clicking here.

 

Lattice Semiconductor (LSCC, $4.36, down $0.28)

Original Entry Price: $6.77 (12/29/2015)

Lowered Price from Selling Options: N/A

Exit Target: $9.00

Return: -36%

Stop Target: $4.00

Action: Support is at $4.25-$4 on continued weakness. Resistance is at $4.75-$5 and the 100-day moving average. Shares have traded lower in 11 of the past 12 session, and I ‘m looking for a short-term bounce. While I would like to trade a possible rebound, I’m sitting tight instead of adding. I still like the longer-term outlook for the company and LSCC is one of my favorite takeover targets this year.

 

 

Relypsa (RLYP, $19.44, down $0.68)

RLYP January 30 call (RYLP160115C00030000, $0.10, down $0.10)

Original Entry Price: $28.29 (12/28/2015)

Lowered Price from Selling Options: $26.14

Exit Target: $30.00+

Return: -26%

Stop Target: $14.00

Action: The January 30 call options we sold against the position expired last Friday. I could sell a February covered call recommendation this week to lower the cost basis of the trade. If I do, I will send out a Trade Alert.

Support is at $18 with risk to $16 on a close below this level. Resistance is at $20-$22 and the 100-day moving average.

You can read my detailed write-up in the Jan. 4 Issue.

 

Planet Fitness (PLNT, $15.01, up $0.04)

Entry Price: $17.85 (9/16/2015)

Lowered Price from Selling Options: N/A

Exit Target: $22.00

Return: -16%

Stop Target: $12.00

Action: Support is at $14.50-$14 on continued weakness. Resistance is at $15.50-$15.75 and the 50-day moving average.

You can read my latest write-up on PLNT in the Nov. 16 Issue.

 

Rave Restaurant Group (RAVE, $5.31, down $0.25)

Original Entry Price (First Position): $13.92 (7/9/2015)

Lowered Price from Selling Options: N/A

Exit Target: $20.00

Return: -62%

Stop Target: $5.00

 

Original Entry Price (Second Position): $11.70 (8/17/2015)

Lowered Price from Selling Options: N/A

Exit Target: $13.00+

Return: -55%

Stop Target: $5.00

Action: Support is at $5.25-$5. Resistance is at $5.50-$5.75.

You can read my most recent write-up on the company in the Dec. 24 Mid-Week Issue.

 

Rigel Pharmaceuticals (RIGL, $2.84, down $0.07)

Original Entry Price: $3.51 (6/2/2015)

Lowered Price from Selling Options: N/A

Exit Target: $4.00-$5.00

Return: -19%

Stop Target: $2.00 (Stop Limit)

Action: There is risk to $2.60-$2.50 if shares fail to hold $2.70 on another backtest. Resistance is at $2.90-$3 and the 100-day moving average.

 

Flex (FLEX, $9.35, down $0.40)

Original Entry Price: $12.55 (5/19/2015)

Lowered Price from Selling Options: N/A

Exit Target: $15.00+

Return: -26%

Stop Target: $9.00 (Stop Limit)

Action: Support is at $9 and where the Stop Limit is set. Resistance is at $10-$10.25.

 

Psychemedics (PMD, $9.01, down $0.05)

Original Entry Price: $15.67 (5/5/2015)

Lowered Price from dividends: $15.22

Exit Target: $15.75 (Limit Order)

Return: -41%

Stop Target: $7.75 (Stop Limit)

Dividend Yield: 5.7%

Action: Support is at $9-$8.50. Resistance is at $9.50-$10.

 

Huttig Building Products (HBP, $3.16, down $0.03)

Original Entry Price: $4.00 (8/13/2014)

Lowered Price from Selling Options: N/A

Exit Target: $6.00+

Return: -21%

Stop Target: $2.00 (Stop Limit)

Action: Support is at $3.10-$3. Resistance is at $3.25-$3.30 and the 200-day moving average.

 

Rambus (RMBS, $10.98, down $0.23)

Original Entry Price: $17.83 (11/14/2011)

Lowered Price from Selling Options: $16.38

Exit Target: $15.00+

Return: -33%

Stop Target: $9.00

Action: Support is at $11-$10.75. Resistance is at $11.25-$11.50 and the 50-day moving average.

 

Trades on Hold (1): These are trades that are still open in the portfolio but are down from the original recommended price. These trades are on “hold” and are not a buy until I bring back coverage of the stock. This means I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when a trade closes. I do not recommend adding to these positions or opening new positions.

Zynga (ZNGA, March 2014) — Continue to hold.

Trade on!

Signed

Rick Rouse
Editor
Momentum Stocks Weekly