In This Issue:
Dear Momentum Options Subscriber,
The market had its first winning week of 2016 last week following a strong finish on Friday. However, two-straight winning sessions hardly makes for a trend, and it’s a little too soon to say that a “V-shaped” recovery is in store. On the other hand, the near-term outlook appears promising, as a number of the technical indicators I follow have turned bullish.
The bears remain in the picture, and they will likely keep a tight leash on the bulls even while they rest. They might become restless if upper resistance is cleared or if the watchful eye of the Fed comes into play. Earnings could also play a major role in determining where the action is headed, as a number of major earnings announcements will weigh on the major indices this week.
The Dow jumped 210 points, or 1.3%, to end at 16,093 on Friday. The blue-chips traded to a high of 16,136 shortly after the open, with upper resistance at 16,200 holding. The next hurdles are at 16,350-16,400, and I’m looking for a short-term rally to 16,600 on continued strength. Fresh support is at 15,900-15,800. A close below the latter will likely lead to fresh-2016 lows near the late-August 2015 trough.
The S&P 500 surged 38 points, or 2%, to finish at 1,906. The index was strong throughout the day, with the bulls making a late-day run to 1,908. The close above 1,900 was bullish and should lead to a short-term run to 1,920-1,925. There is a good chance that 1,940-1,950 will come into play on a move above the latter. Support is at 1,875-1,870, but fresh lows are likely if these levels are breached.
The Nasdaq zoomed 119 points, or 2.7%, to settle at 4,591. Tech went out at its session high, with short-term resistance at 4,600 holding. Momentum could easily carry the bulls towards 4,650-4,700 this week. Support has moved up to 4,575-4,550. Another close below 4,500 could lead to another round of panic-selling.
The Russell 2000 rallied 23 points, or 2.3%, to close at 1,020. The small-caps soared to 1,021 on the opening strength while holding the 1,010 level throughout Friday. The move into upper resistance at 1,020-1,025 looks bullish for a possible trip towards 1,035-1,050 this week. Support is at 1,010-1,000, but another close below the latter would be a very bearish development.
The S&P 500 Volatility Index ($VIX, 22.34, down 4.35) tanked 16% after testing a low of 22.22 into the close. The bulls cleared three levels of major support following the open back below 25, which is now serving as resistance. The close below 23.50-22.50 was a huge development, and it gets 20-19 and the 50-day moving average back in play. A test to 17.50 could come on a move below 19, which is a level I expect the bears will fight hard to defend.
With a full week of trading ahead and the heart of fourth-quarter earnings season upon us, this week should provide quite a few trading opportunities to go long, short or both.
Apple (AAPL, $101.42, up $5.12) jumped 5% on Friday to regain the $100 level, but the technical outlook remains bearish. The 50-day moving average has crossed back below the 100-day moving average, and a “death cross” formed back in late August. Near-term resistance is at $102.50-$105. Support is at $97.50-$95 on a move back below $100.
Shares could make a run towards $107.50-$110 on continued strength and a better-than-expected earnings report on Tuesday. An earnings miss and lowered guidance could also send shares tumbling.
Wall Street is expecting Apple to earn a profit of $3.23 a share on revenue of $76.61 billion. The high estimate has the company earning $3.44 a share on revenue of $79.96 billion. The low-ball numbers are for $2.83 a share on revenue of $70.65 billion.
This could either mean a headline reading of a $0.21 beat or a $0.40 miss. This type of earnings news could cause shares to move 5%, 7% or possibly 10%, or roughly $10. Shares of Apple could trade above $110 or in the low $90s in extended trading on Tuesday and going into Wednesday’s open. The Aug. 24 low touched $92, and the 50- and 100-day moving averages are just below $110 and $112.
The company has topped estimates during the past four quarters by $0.08, $0.04, $0.17 and $0.46, respectively. However, the earnings beats have become less and less dramatic during the past year, with questions galore as to what is in store for Apple.
These factors tend to lead me toward a bearish trade heading into the announcement, but it’s never a good idea to tug on Superman’s cape. The suits-and-ties are worried about gross margins, weaker-than-expected demand for the latest iPhone and overall erosion in AAPL’s other products. I’m more focused on the company’s $200 billion plus in cash and its fundamentals, which is why I’m bullish on Apple’s long-term future.
Although I’m a little chicken betting on AAPL’s earnings, a strangle option trade might serve as a better candidate than a directional trade. These types of trades are also called “chicken” trades.
The goal of a strangle option trade is to buy out-of-the-money calls and puts together to capitalize on a huge move in a stock in one direction or another. However, it is important to check the premium prices and do some math before picking the options. Additionally, a move of less than 10% in a stock can often lead to negative results in a strangle trade if the premiums get deflated.
Weekly and monthly options are both available to trade on Apple. With earnings due out on Tuesday, I looked at the January weekly chain for a possible setup to avoid paying any unnecessary time premium.
The AAPL January 29 expiration 105 weekly calls (AAPL160129C00105000, $1.70, up $1.13) were up nearly 200% last Friday on volume of more than 17,000 contracts. These options expire this Friday, but they could be used by bullish traders expecting a run past $107 and up to $110. These options would double if AAPL shares trade past $108-$108.50 on Wednesday, or ahead of Friday’s closing bell.
The AAPL Jan. 29 expiration 95 weekly puts (AAPL160129P00095000, $0.95, down $1.55) fell more than 60% on volume that topped 7,500 contracts. Bearish traders could target these options for a quick in-and-out trade and a possible test to the low $90s. A double would occur if shares trade below $93 on Wednesday’s open, or by Friday’s close.
The aforementioned options together would cost roughly $2.65 based on Friday’s closing prices. For traders that can get into both options for under $3, the breakeven points for the trade would be $108 and $92. A double would occur if shares are above $111 or below $89 by this Friday’s close.
Both cases are possible, but it’s a lot of premium to pay for a short amount of time on a move that may or may not materialize.
Turning back to the broader market, Wall Street remained bullish on the market coming into 2016, with 10 top analysts predicting gains of 3%-13% for the year, with price targets for the S&P 500 between 2,100-2,300. The S&P came into the year just south of 2,044.
There were two targets of 2,100 from BMO Capital and Goldman Sachs. An analyst from Credit Suisse has a target of 2,150, while another from Morgan Stanley has penciled in a target of 2,175. Bank of America/Merrill Lynch, Barclays and JPMorgan have set their target for the S&P at 2,200.
There are two super-bullish calls from Deutsche Bank and S&P Capital IQ that have the index tripping 2,250. The most bullish is an analyst from Oppenheimer that has a price target of 2,300 for the S&P by year-end.
At current levels (1,906), the S&P has to gain 10% to reach 2,100 and 15% to trigger 2,200. The index would need to advance 18% to tap 2,250 and 21% to clear 2,300. It remains to be seen if these price targets will be adjusted at some point given the 7% drubbing to start the year.
The most bearish outlook came from a strategist at Société Générale. I doubt a possible 75% crash is in the cards this year, but the firm has argued that a worst-case scenario could have the S&P 500 testing…550! It sounds crazy and highly unlikely, but it’s possible.
I like to make my year-end market predictions in February, and I have already prepared for a down year. The charts from the Jan. 4 Pre-Market Update action showed that a nasty breakdown was forthcoming following a tremendously long three-month trading range.
For those of you who stayed the course and followed me daily, you were well prepared for the pullback. For other investors that bailed on the market, they missed out on the tremendous downside action. They will also be the ones who are afraid to snap-up stocks at bargain basement prices.
I also noticed a number of other technical signals that confirmed the market could have a rough 2016 following the Aug. 24 flash crash. The most important was the breakdown and the technical damage that was done in the 10-year charts, especially with the Nasdaq falling below the 4,500 level in late August.
The action in the VIX and the negative Monday/Friday closes were also great clues that money was moving out of the market. A failed Santa Claus rally, a breach of the December lows and a non-existent January effect have also been clear signals that the bears were coming.
The past three weeks have been an excuse by the so-called pros to retreat to the sidelines and into cash. Investors who do this and follow the “advice” of the talking heads often make big mistakes by panicking and not knowing how to “short” stocks.
Everyone has their own pain tolerance, and the art of shorting a stock or using put options in bear markets is hard for average investors to understand. However, I learned to play both sides of the markets decades ago, and I knew coming into 2016 that it would be a great time to go short and use put options. Of course, we’ll also be able to go long stocks using call options at cheaper prices in the months ahead.
The technical outlook remains bearish, and I have been warning about the “death crosses” that were confirmed this month on the Dow and S&P 500. The Nasdaq’s chart joined the club last week, with the 50-day moving average falling below the 200-day moving average.
These are big developments, but it doesn’t mean that there can’t be a short-term rally toward the major moving averages during the next few weeks. However, near-term-support must hold on any pullbacks this week.
From desk to press, futures look like this: Dow (-50); S&P 500 (-6); Nasdaq 100 (-12); Russell (-5).
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.
Cisco Systems (CSCO, $23.37, up $0.47)
CSCO February 24 calls (CSCO160219C00024000, $0.54, up $0.11)
Entry Price: $0.52 (1/22/2016)
Exit Target: $1.10
Stop Target: None
CSCO March 25 calls (CSCO160318C00025000, $0.35, up $0.03)
Entry Price: $0.40 (1/22/2016)
Exit Target: $0.90
Stop Target: None
Action: Near-term resistance is at $24-$24.50 on continued strength, which is where I would like to begin taking profits. Fresh support is at $23.25, followed by $23-$22.50.
You can read my full writeup in the Jan. 22 Mid-Market Update.
Garmin (GRMN, $33.84, up $0.71)
GRMN February 30 puts (GRMN160219P00030000, $0.67, down $0.04)
Entry Price: $0.93 (1/20/2016)
Exit Target: $2.00
Stop Target: None
Action: Resistance is at $34. There is risk to $35-$36 on a close above this level. Support is at $33 followed by $32-$30.
You can read my expectations for earnings in the Jan. 12 Pre-Market Update.
Harley-Davidson (HOG, $40.73, up $0.06)
HOG February 37.50 puts (HOG160219P00037500, $0.93, down $0.09)
Entry Price: $1.20 (1/20/2016)
Exit Target: $2.40
Stop Target: None
Action: Resistance is at $41-$42. Support is at $40, followed by $38.75.
You can read my full write-up on HOG in the Jan. 21 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