Dear Momentum Options Subscriber,
The market suffered its worst trading day in months on Wednesday, as volatility soared to fresh highs and the August lows came back into play. However, the bulls recovered nicely from the mid-day madness, and the small-caps rebounded to regain positive territory by the closing bell.
Some of the strength can be attributed to monetary-easing plans from central banks overseas as well as talk that the Federal Reserve might be planning its own stimulus package, including a cut in interest rates. I doubt this will be the case for the Fed and, if the rumors turn out to be false on either front, further selling pressure could be in store.
The Dow fell 249 points on Wednesday, or 1.6%, to settle at 15,766. The blue-chips traded to an intraday low of 15,450, but the bears failed to take out the late-August low of 15,370. The 565-point drubbing was cut in half by the closing bell, but the finish below 15,800 remains a slightly bearish clue. Shaky support is at 15,600-15,450. Resistance is at 15,900-16,000.
The S&P 500 climbed 22 points, or 1.2%, to close at 1,859. The index stumbled to a low of 1,812 intraday, and I mentioned coming into the week that there could be further weakness to 1,825-1,800 if 1,850 failed to hold. The close above this level was slightly bullish, but the inability to hold 1,860 was slightly bearish. A move below 1,840 today will likely get fresh lows in play. Resistance is at 1,875-1,880.
The Nasdaq slipped 5 points, or 0.1%, to end just below 4,471. Tech tumbled to a low of 4,313, but the bears failed to take out the Aug. 24 low of 4,292. I warned that there could be risk to 4,300 if 4,400 was breached this week, and Wednesday’s open at 4,405 was a good clue that this target would come into play. The rebound to 4,514 and resistance at 4,500-4,525 looked bullish, but these levels failed to hold into the close.
A “death cross” has formed on the Nasdaq’s chart, with the 50-day moving average now below the 200-day moving average. This is a bearish development that could lead to additional selling pressure down the road. On the other hand, continued closes above 4,525-4,550 would be a bullish.
The Russell 2000 climbed 4 points, or 0.5%, to finish at 999. The small-caps tested a low of 958 before rebounding to reach a late-day peak of 1,008. I warned of further weakness to 960-950 on a move below 975, and the signals are mixed following the close below the 1,000 level for the second-straight session. A move above 1,010-1,015 would be a slightly bullish signal, but any rallies can’t be trusted until 1,025 is cleared and held for several sessions. Another drop below 975 would represent continued selling pressure.
The S&P 500 Volatility Index ($VIX, 27.59, up 1.54) added 6% after spiking to a high of 32.09 during the height of the pullback. The bulls held upper resistance at 30-35, but the close above 27.50 keeps these levels in play. Support is at 25.
Yesterday’s action made it feel as though we could be getting closer to a capitulation moment, so it is still hard to trust bullish trades at this juncture. At some point, there will be a sharp, snap-back rally, but we will need to see multiple days of higher highs and higher lows before we are able to trust the bulls. Wednesday’s whipsaw action represented lower highs and lower lows for the second-straight session.
From desk to press, futures look like this: Dow (-79); S&P 500 (-8); Nasdaq 100 (-15); Russell (-8).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 11-0 (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.
Garmin (GRMN, $32.35, up $0.06)
GRMN February 30 puts (GRMN160219P00030000, $0.76, up $0.01)
Entry Price: $0.93 (1/20/2016)
Exit Target: $2.00
Stop Target: None
Action: Shares of Garmin traded to a fresh 52-week low of $30.93 on Wednesday before rebounding to $32.65.
Shares remain in a downtrend, and I’m expecting a trip to $30 over the near term. A close below this level could lead to additional selling pressure down to $28-$27.50. Resistance is at $32.50-$33, followed by $34. Earnings are due to be released on Feb. 17.
You can read my expectations for earnings in the Jan. 12 Pre-Market Update.
Harley-Davidson (HOG, $39.91, down $0.75)
February 37.50 puts (HOG160219P00037500, $1.28, up $0.23)
Entry Price: $1.20 (1/20/2016)
Exit Target: $2.40
Stop Target: None
Action: Shares of Harley-Davidson traded down to a multi-year low of $38.88 yesterday. There is risk to $37.50-$35 on continued weakness. Resistance is at $41-$42 on a move back above $40-$40.50. Support is at $38.75, followed by $37.50.
The company is scheduled to announce earnings on Jan. 28. I will provide a detailed write-up on what to expect in today’s Mid-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 — Continue to hold.
3D Systems (DDD) February 11 calls — Continue to hold.
Editor and Chief Options Strategist