In This Issue:
Dear Momentum Options Subscriber,
The bears snapped a two-week losing streak following Friday’s pullback to the market’s lower levels of support. The bulls’ failure to clear major resistance levels continues to be a problem, with lower highs and lower lows coming into play, and tech and the small-caps are in danger of testing fresh lows for the year if there is no recovery this week.
The Dow tumbled 211 points, or 1.3%, to settle at 16,204 on Friday. The blue-chips made a brief trip into positive territory to 16,423, but the 7-point gain quickly evaporated. The late-day low reached 16,129, and the close above 16,200 was a slightly bullish signal. There is a risk of hitting 16,000-15,800 on a move below 16,100. Resistance is at 16,350-16,400, followed by 16,600 above.
The S&P 500 stumbled 35 points, or 1.9%, to finish at 1,880. The index traded in negative territory throughout the session, with the bears pushing a low of 1,872. Support at 1,875-1,870 held, and backup support can be found at 1,850. Resistance is at 1,900-1,905, and there are additional hurdles at 1,920-1,925.
The Nasdaq sank 146 points, or 3.3%, to close at 4,363. Tech leveled out during the final few hours of trading after holding backup support at 4,350. The January low reached 4,313, and the close below 4,400 was extremely bearish. It was the first close below this level in over a year, and it keeps the 52-week and late-August low of 4,292 in play. A move above resistance at 4,400-4,425 today would be a slightly bullish signal.
The Russell 2000 tanked 29 points, or 2.9%, to end at 985. The small-caps also closed at their lowest level in more than a year after going out at their session low on Friday. The Jan. 20 bottom reached 958, and a move below 950 will likely lead to panic-selling. Resistance is at 995-1,000, and a close above the latter, quickly, would be a bullish signal.
The S&P 500 Volatility Index ($VIX, 23.38, up 1.54) gained 7% and reached a peak of 24.11 on Friday. The bulls held upper resistance at 25, and the close between 23.50-22.50 was a slightly bullish signal. Support at 20 remains rock solid, and that is a level the bears have held in 22 of the past 24 sessions this year.
The MSCI USA Momentum Factor ETF (MTUM, $66.39, down $2.05) is an easy-to-follow indicator that gauges momentum in stocks. As you can see from the chart below, the index is once again at major support levels, and a close below $66 would likely be a bearish development. This level held in August, September, January and again on Friday.
The late-August low touched double-nickels ($55), and that level could come into play on further weakness. More importantly, the 50-day moving average is on the verge of falling below the 200-day moving average. This would confirm a “death cross,” which is usually a bearish setup to lower lows.
As far as specific stocks go, shares of LinkedIn (LNKD, $108.38, down $83.90) fell a whopping 44% on Friday despite reporting better-than-expected fourth-quarter results. The company topped Wall Street’s estimates by $0.16 after announcing earnings of $0.94 a share on revenue of $862 million. Analysts had penciled in $0.78 a share on revenue of $857 million.
The problem was the 2016 forecast for earnings of $3.05-$3.20 a share on revenue of $3.6-$3.65 billion. The suits-and-ties had estimates for $3.67 a share on revenue of $3.9 billion.
The 52-week and multi-year low for LNKD reached $102.81 on Friday, and there is risk to $95-$90 if $100 fails to hold. Overhead resistance is in the $115-$125 area.
Shares were trading north of $192 going into Thursday’s close. When it comes to trading around earnings, it’s always best to do the math for a move of at least 10% in a stock to see if a call or put option trade is plausible. This would have translated into a $19-$20 move in LNKD shares going into the earnings announcement.
The LNKD February 170 puts (LNKD160219P00170000, $61.50, up $56.80) were trading for $4.70 ahead of Thursday’s close and zoomed an incredible 1,200% on Friday. I normally shy away from stocks trading over $100 and options that trade over $2 due to the high premiums. Needless to say, however, bearish traders that stepped up to the plate cleaned up.
Given the nearly 50% discount, bullish traders are arguing that shares are way oversold. Obviously, the near-term call options were hammered on the pullback. The LNKD February 210 calls (LNKD160219C00210000, $0.01, down $6.19) fell over 99% on the lowered outlook after closing Thursday’s session at $6.20. While I would avoid short-term options on LNKD, there could be a longer-term trade in the name if shares hold par.
Another “momentum” stock that took it on the chin Friday was Salesforce.com (CRM, $58.51, down $8.69). There was no specific news related to the company, but shares fell 13% in sympathy with the earnings results from Tableau Software (DATA, $41.33, down $40.42), which saw its shares sink nearly 50%.
Much like LinkedIn, Tableau topped expectations but slashed current-quarter earnings and revenue guidance. I don’t actively follow DATA, but I do track CRM. Salesforce.com is scheduled to announce earnings on Feb. 24, and I believe they may have had a better quarter than analysts are forecasting. The current estimates are at $0.19 a share on revenue of just under $1.8 billion.
The company has topped or matched estimates during the past four quarters, and the “whisper” earnings number is as high as $0.22 a share on sales of $1.81 billion. A bearish target has the company missing estimates by a penny.
With CRM shares at two-year lows, it is a little too early to establish bullish positions, as the chart shows risk to $55-$50. Fresh resistance is at $60-$62.50.
We have time to wait and see how shares trade into the week of the earnings announcement. If a base forms at $57.50-$55 on lower lows, I will be targeting the CRM March 60 calls (CRM160318C00060000, $4.15, down $4.35) for a possible rebound play. These options will get cheaper on continued weakness in the stock, so we’ll continue to watch them, as they were heavily traded on Friday.
The CRM March 50 puts (CRM160318P00050000, $1.85, up $1.47) zoomed nearly 400% on Friday after trading to a high of $2.05. These options closed Thursday at $0.38. While these options now seem expensive, they could run further if shares fail to hold Friday’s fresh 52-week low of $57.75.
Weekly options are also available on CRM, so the aforementioned options are just a starting point from my weekend research. If I decide to take action on a bullish or bearish trade, I will send out a Trade Alert.
With the market backpedaling for much of 2016, Gold ($GOLD, $1,174.10, up $18.10) has climbed nearly 10% year-to-date. Last week’s move above the 200-day moving average was a bullish signal, and that should bring the $1,200 level in focus. The 50- and 100-day moving averages are also curling higher, with fresh support moving up to $1,160-$1,150.
I often profile the SPDR Gold Trust ETF (GLD, $112.32, up $1.75) as a way to play the swings in gold, and it is showing the same technical setup. Friday’s close above $112 should get $114 in the mix. The 52-week high is north of $119. Support is at $110, followed by $108.50-$108 and the 200-day moving average.
The GLD February 114 calls (GLD160219C00114000, $1.00, up $0.60) zoomed 150% on Friday after closing at $0.40 on Thursday. These calls could have more room to run if gold continues to spike, but I don’t like chasing, and these options expire next Friday.
The GLD March 116 calls (GLD160318C00116000, $1.50, up $0.60) surged 67% on Friday on heavy volume of over 24,000 contracts. These call options would provide an extra month of time for a bullish trade to play out, with a “breakeven” price of $117.50. If GLD shares are at $119, technically, by mid-March, these options will double from current levels.
This week’s action could be tricky to trade, as China’s stock market will be closed all week. This could be good or bad for the market depending on whether or not China uses the opportunity to devalue its currency again.
There will also be some Fed talk this week, as Janet Yellen is scheduled to speak on Wednesday and Thursday. Earnings will also play a larger role in market direction given the lack of economic news due out this week.
I have talked about a lower trading range coming into play, as well as the possibility of lower lows, and I believe that a continued trading range could be in store for another week or so as long as the VIX holds 25. A close above this level should get lower lows in play, while a move below 20 should keep open the possibility of higher highs at some point this month. Tech and the small-caps also need to hold their January lows this week.
From desk to press, futures look like this: Dow (-216); S&P 500 (-26); Nasdaq 100 (-84); Russell (-13).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 16-2 (89%). 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.
Wal-Mart Stores (WMT, $67.00, up $0.58)
WMT March 60 puts (WMT160318P00060000, $0.61, down $0.02)
Entry Price: $0.65 (2/4/2016)
Exit Target: $1.00-$1.30 (Limit Order on first half at $1.00)
Stop Target: None
Action: Resistance is at $68, and there is risk to $70 if that level is cleared. Support is at $66.50 and the 200-day moving average, followed by $65.
Earnings are due to be released on Feb. 18.
Rambus (RMBS, $12.00, down $0.35)
RMBS March 13 calls (RMBS160318C00013000, $0.30, down $0.07)
Entry Price: $0.35 (2/2/2016)
Exit Target: $0.70
Stop Target: None
Action: Support is at $11.75, followed by $11.65-$11.50 and the 50- and 100-day moving averages. Resistance is at $12.25-$12.50, followed by $12.75 and the 200-day moving average.
You can read my extended write-up in the Feb. 2 Pre-Market Update.
Opko Health (OPK, $8.26, down $0.18)
OPK March 7 puts (OPK160318P00007000, $0.25, up $0.03)
Entry Price: $0.35 (1/25/2016)
Exit Target: $0.70
Stop Target: None
Action: Near-term support is at $8.25-$8. Resistance is at $8.50.
You can read my earlier write-up in the Jan. 26 Pre-Market Update.
Trades on Hold — other 2015 Portfolio Open positions (1): 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.
Garmin (GRMN) February 30 puts — Earnings are due to be released on Feb. 17, before the market opens. Resistance is at $35.50 and the 50- and 100-day moving averages. Support is at $34 — Continue to hold.
Editor and Chief Options Strategist