In This Issue:
Dear Momentum Options Subscriber,
The bulls survived another volatile week to get their second-straight weekly win as the bears retreated during Friday’s session. The surge and rebound past key resistance levels was a bullish sign after wrapping up the worst January since 2009. However, stronger overhead hurdles remain, and February is always a tricky month to trade.
The Dow zoomed 396 points, or 2.6%, to finish at 16,466 on Friday, with the blue-chips staying in a steady uptrend throughout the session while closing at their session high. The move above 16,350-16,400 was a bullish signal and will serve as short-term support with backup at 16,200. Major resistance is at 16,600 — a level that has held throughout the month. A close above this level could lead to a run at 17,000-17,100 and the 50-day moving average above.
The S&P 500 surged 46 points, or 2.5%, to settle at 1,940. The benchmark showed strong momentum from the open and also closed at its session high. The move into prior support also looked very bullish with fresh support moving up to 1,925-1,920. Short-term resistance is at 1,960 followed by 1,975-1,980. The 50-day moving average is 3% away and just north of the 2,000 level.
The Nasdaq jumped 107 points, or 2.4%, to close at 4,613. The tech index hovered above the 4,550 level during the first half of Friday’s action, which is an area that will serve as backup support if 4,600 fails to hold. The close above this level was a bullish development with resistance at 4,650-4,700. A move above the latter could lead to a run toward 4,800-4,850 and a downward sloping 50-day moving average.
The Russell 2000 rallied 32 points, or 3.2%, to end at 1,035. The small-caps led Friday’s charge with their move into resistance at 1,035-1,040. Additional hurdles lie at 1,050-1,060 followed by 1,070-1,075. The 50-day moving average is 76 points away and would require a 7% move in the index to reach this level. Support will try to hold at 1,025-1,020 on a pullback. A move below the latter would negate the current momentum.
The S&P 500 Volatility Index ($VIX, 20.20, down 2.22) fell 10% to close just outside the 20 level. The bulls pushed a low of 19.50 and I have been mentioning a close below 20 and the 50-day moving average could lead to a breakout rally. The VIX could test 17.50 and the 200-day moving average on continued strength but needs several closes below this level to confirm a sustained rally in the market. Any close back above 22.50-23.50 would be a bearish development.
I talked about a bottoming process forming late last week, and this week’s action will go a long way in determining if higher highs or lower lows are in store for February. The bears pushed double-digit losses for the market by midweek, and January’s pullback was likely a precursor of things to come despite the relief rally.
For the week, the Dow added 2.3% but is down 959 points, or 5.5%, for the year. The S&P 500 gained 1.7% but dropped nearly 104 points, or 5%, in January.
The Nasdaq climbed 0.5% last week but has fallen 392 points, or nearly 8% year-to-date. The Russell 2000 was higher by 15 points for the week, or 1.5%, but has declined 100 points, or nearly 10%, to start 2016.
The biggest development from Friday was the action in the VIX. The Jan. 5 low touched 19.25 with the only close below 20 at 19.34 all last month. The last time the VIX was below 17.50 was on Dec. 30 and the five sessions prior. The index has traded below 15 since early December.
If the bulls can get the VIX below 20 and hold this level into today’s close, it could be a good signal that a significant rally could occur during the next few weeks. The two aforementioned support levels at 17.50 and 15 are the main targets that need to clear afterward, but how fast –or not so fast — they come into play is the bigger question.
If the bears keep the VIX above 20 for the next several sessions along with higher highs and a breach of the 23.50 level, more damage is in store along with lower lows.
For those who have followed me over the years, I continue to say the VIX has been one of the best indicators for market action. While other slick-talking pros dismiss the VIX and say it is “broken,” it has been extremely helpful to me in identifying short-term bullish and bearish trends along with trading ranges.
The Monday/Friday closes have been bearish during the past few months but have been improving of late. The bears are still dominating the action on Mondays as the Dow fell two out of the three Monday sessions in January. Mixed in was a higher Tuesday following a Monday the market was closed.
The Friday closes are starting to improve as the bulls have won the past two following a lower Dow the first two Fridays in January. Higher Monday/Friday closes signal money is moving into the market while lower closes could be a sign cash is moving to the sidelines. Mixed Monday/Friday closes can indicate possible trading ranges.
Financials also played a key role in stopping the bleeding. The Financial Select Sector SPDR ETF (XLF, $21.72, up $0.59) gained nearly 3% Friday following last Monday’s test to $20.80. I mentioned earlier this month it would be imperative the XLF holds $20, and the January low reached $20.53.
The chart below shows the August low of $18.31 and would likely have been tested on a breach of the $20 level. However, the more important development is another mini “death cross” that has formed with the 50-day moving average falling below the 100-day moving average. This is a bearish development to watch going forward with major resistance at $22-$22.50.
Another sector I want to update you on is biotech. The iShares Nasdaq Biotechnology ETF (IBB, $267.05, up $3.58) tested a fresh 52-week low of $259.06 last week and is down over 20% from the December peak just shy of $344.
The major moving averages are in a significant downtrend with no near-term signs of leveling out. The sector has come under fire following overinflated and higher drug prices along with the failing Affordable Care Act, or Obamacare. Healthcare stocks have also taken a shellacking and can be easily tracked by following the iShares Dow Jones U.S. Healthcare Providers ETF (IHF, $115.68).
The IHF exchanged-traded fund has been in a mini trading range since bottoming at $110.32 in January. Short-term support is at $112.50 but a move below $110 could get the late August of $95 and change in play. Resistance is at $117.50 followed by $120-$121 and a downward sloping 50-day moving average.
While there is a good chance a rebound rally could lead to $120+, I will be watching for a break below $112-$110 to possibly go short the index. However, options are thinly traded on IHF with wide bid/ask spreads. This will likely deter me from trying to trade options but it will help determine momentum in the sector.
Investing in the biotech sector always carries risk but the rewards can be exciting if you can find momentum plays or companies with solid pipelines. One stock I want to bring to your attention is Inovio Pharmaceuticals (INO, $6.68, up $0.90).
Shares surged 15% on Friday to close above the 50- and 100-day moving averages. Volume was enormous with nearly 9 million shares exchanging hands. The major moving averages are also leveling out with overhead resistance at $7-$7.25 and the 200-day moving average. A close above the latter could lead to a short-covering rally toward $8-$10.
I don’t like to chase stocks but bullish traders can use limit orders up to $7.25 on this morning’s open. If shares open below this level, you will get a better fill price and I would look to exit the trade at $8-$10. Given the volatility, a stop can be set at $4.25 and below the recent 52-week low of $4.50.
The options for INO also look tempting to play as continued momentum and a possible run toward double-digits could materialize. The INO February 7 calls (INO160219C00007000, $0.45, up $0.30) surged 200% on Friday on heavy volume. Bullish traders can try to get into these call options for $0.55 to $0.60 on this morning’s open if shares stay strong.
The INO February 7 call options expire in less than three weeks and make me a little nervous given the time period. These options could double or triple again from current levels if the stock makes a run to $8-$8.50 by Feb. 19.
The INO March 7 calls (INO160318C00007000, $0.80, up $0.25) would give the trade another four weeks to play out with a breakeven price of $7.80 if the stock reaches this level. A double in the options would occur if INO trades to $8.60, technically, by mid-March.
The INO May 7 calls (INO160520C00007000, $1.07, up $0.45) jumped 72% but were thinly traded. These options are worth a look for longer-term traders with a double occurring if INO shares trade past $9.15 by mid-May.
The company has nine clinical drugs in development, mostly in Phase 1, which is why the stock carries significant risk. However, with no vaccines or treatments for the Zika virus, shares have been on the move as the public becomes more aware of the threat.
The mosquito-borne disease has started to spread from Brazil and is now recognized in more than 20 countries. The Zika virus has been linked to an astonishing rise in pregnant women who give birth to babies born with unusually small heads.
Inovio Pharmaceuticals is working on a vaccine for the Zika virus that could be ready for emergency use later this year. The company’s lead developer said they were well ahead of the field in the race for a vaccine, and timing is everything.
This news alone is not enough to warrant a major position in your portfolio but momentum and the longer-term outlook make the stock attractive. If Inovio is able to score on some of its other drugs in development, shares could easily reach low double-digits at some point during the next six to 12 months. The company also has strong partnerships with other big-pharma names it can exploit to help finance its clinical pipeline.
There are a number of other trades I like in what could be a busy week for the portfolio. I have a number of bullish and bearish trades on my Watch List and I will be covering more possible new trades in the coming days. We just need to be patient and confirm market direction before jumping in.
From desk to press, futures look like this: Dow (-103); S&P 500 (-13.5); Nasdaq 100 (-25.5); Russell (-6).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 14-2 (88%). 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.
Opko Health (OPK, $8.04, up $0.35)
OPK March 7 puts (OPK160318P00007000, $0.35, down $0.10)
Entry Price: $0.35 (1/25/2016)
Exit Target: $0.70
Stop Target: None
Action: Resistance is at $8.25. Near-term support is at $7.75-$7.50 if $8 fails to hold. My near-term target for the stock is a test to $6. The longer-term chart shows a possible breakdown to $5. At $6, these options would be $1 “in the money” and, at $5, the options would be worth $2.
You can read my earlier write-up in the Jan. 26 Pre-Market Update.
Garmin (GRMN, $35.18, up $1.30)
GRMN February 30 puts (GRMN160219P00030000, $0.32, down $0.15)
Entry Price: $0.93 (1/20/2016)
Exit Target: $2.00
Stop Target: None
Action: Resistance is at $35.50 and the 50-day moving average. A close above $36 could force us out of the trade. Support is at $34.50-$34.
You can read my expectations for earnings in the Jan. 12 Pre-Market Update.
Editor and Chief Options Strategist