In This Issue:
Dear Momentum Options Subscriber,
The bears got their second-straight weekly win last week despite a major rally by the bulls on Friday to regain resistance. However, the break below the January and fresh 52-week lows by tech and the small-caps was something I previously said we should be wary of, as the technical damage continues to worsen.
The broader market also set a fresh yearly low, while the blue-chips held their October low. There could be some relief this week on a continued backtest to upper resistance, but the lower lows and lower trading range I have been warning about have played out as I anticipated.
The Dow jumped 313 points, or 2%, to settle at 15,973 on Friday. The blue-chips opened at 16,691 and got stronger throughout the session while clearing resistance at 15,800-15,900. These levels are now acting as short-term support. Additional hurdles remain at 16,000-16,200.
Coming into this year, I highlighted the previous trading range of 17,200-18,000 for the Dow from October through December. I had been warning of the prior trading range for two months and, as you can see, the “symmetrical triangle” gave me a great clue that lower lows could be in play to start 2016.
The new trading range for the index is now at 15,600-16,600, as you can see from my latest chart work. If the bulls can clear 16,200 this week, there is a chance that 16,600 and the top of the range could be tested. A move above this level could lead to a run to 16,800 and the 50-day moving average. From there, the Dow could be in the midst of topping or a continued rally could ensue. While there is wiggle room below 15,600 on a pullback, I could get aggressive with put options on another move below this level.
The S&P 500 surged 35 points, or 2%, to finish at 1,864. The index easily cleared the 1,850-1,860 zone, which is now short-term support, and went out at its session high. The next wave of resistance is at 1,875-1,880.
The S&P 500 had previously been in an 80-point trading range between 2,020 and 2,100 at the end of 2015 before the breakdown to a fresh 52-week low of 1,810 last week.
The test to 1,810 and the breach below the January low of 1,812 violated a previous 75-point trading range between 1,875 and 1,950. Obviously, the new range has been stretched, as the index closed below 1,875 on Friday. A close above this level could lead to a retest of 1,900-1,925 over the short term. There is still risk to 1,800 if the bulls fail to hold the momentum
The Nasdaq zoomed 70 points, or 1.7%, to close at 4,337. Tech opened above the 4,300 level at the start of trading before making a slight backtest to 4,274. Short-term support at 4,300-4,275 held before a rebound to 4,340 late in the day. Near-term resistance is at 4,350-4,400.
The Nasdaq traded in a 250-point range between 4,900 and 5,150 from October through December before the test to a 52-week low of 4,209 last Thursday.
Tech’s tumble to the 4,200 level and failure to hold the January low of 4,313 and August low of 4,292 was a bearish development. Although the Nasdaq held these levels to close last week, it violated the previous 4,500-4,800 range that held afterwards following the Aug. 24 low. If the bulls can clear 4,400 this week, there is a chance that a run to 4,500-4,600 could come into play. A move below 4,275-4,250 would be a bearish sign going forward, and I could get aggressively “short” if the index breaches 4,200.
The Russell 2000 soared 18 points, or 1.9%, to end at 972. The small-caps held positive territory throughout the day to challenge resistance at 970-975. The close between these levels could lead to a run to 1,000 if the bulls can clear 980 to start the week. Support is at 960-950 on a pullback.
The Russell was mired in a 5% trading range between 1,140 and 1,200 to close out the last three months of 2015. The close below 1,140 and the bottom of the range to end the year was also a good signal that lower lows would come into play. Last week’s bottom at 943 marked a fresh 52-week low, and I have been warning that any closes below 940 could lead to panic-selling.
A lower trading range tried to form between 1,050-1,000 throughout January, but it appears that a new 50-point range is in play between 950 and 1,000. The next 25- or 30-point upside move could lead to a test to the top of the current trading range and a possible breakout. Another 25- to 30-point drop from current levels and a close below 940 could quickly lead to a test to 900.
The S&P 500 Volatility Index ($VIX, 28.14, up 1.85) fell nearly 10% on Friday, but it closed above 25 despite an intraday test to 24.92. I wanted to see the bulls hold 25 into the three-day weekend, and the close just outside this level is keeping me cautious. There is still risk to 27.50-30, and a close below the latter would be another bearish signal. Last Thursday’s intraday high reached 30.30. While the short-term outlook is good for a possible assault to support at 23.50-22.50, it will be hard to trust any rallies until 20 is cleared and held for several sessions. Additionally, a “symmetrical triangle” has formed, which is suggesting that a major breakout or breakdown could be coming over the next week or two.
Much of the whipsaw action last week was the result of comments made by Federal Reserve officials, changes in the price of oil and talk of negative interest rates and a recession.
As far as the Fed goes, Fed Chair Janet Yellen tried to put her best spin on the subject of rate hikes and a possible recession in her testimony to Congress last week. While she believes that there is moderate growth ahead for 2016, Yellen cautioned that financial conditions have recently become less supportive of economic expansion.
Yellen blamed the pullback in the market, higher rates for riskier borrowers and the possibility of further increases in the value of the dollar for the cloudy outlook. However, she went on to add that she didn’t believe the volatility warranted a rate cut in March. There was talk in December that the Fed would hike rates two to four times this year. I will take the under, as the odds remain high (in my book) that there won’t be a rate hike until this December, if there is another one at all.
The Fed may have shot its last bullet a few months ago when it raised rates for the first time in nearly a decade. This means that it is trapped in a corner and hoping growth picks up so it won’t have to “save the economy,” which isn’t their job anyway.
The bottom line is that the market could meander in its current range until March and the Fed’s next rate announcement. As a reminder, a negative interest rate environment is one in which the banks charge you money to keep your money with the bank. If the Fed does go down that path at some point, there will be cash hoarding and redemptions of mutual funds by investors.
Oil rebounded on Friday to post its biggest one-day gain in six years. This follows the making of a new 13-year low on Thursday. “Regular” oil prices dropped below $27 last week before recovering the $30 level on Friday. Meanwhile, Brent oil held the $30 level and, more importantly, its January low just south of $27.50. It has been easy for the talking heads to say that the market has traded in tandem with oil all year, but a chart of Brent versus Crude oil shows this has been somewhat misleading.
While there is a slight connection, oil prices have suffered from oversupply issues, and they have not been the single-biggest factor in the decline in the stock market. Oil started to rebound late last Thursday after OPEC (Organization of the Petroleum Exporting Countries) hinted that it might be close to cooperating on a cut in crude production. While this could lead to higher oil prices down the road, the impact of a cut in production won’t have an immediate effect in the near term.
Gold ($GOLD, $1,238.50, down $8.50) may have reached a short-term peak following its run past $1,260 on Thursday. I mentioned coming into last week — with gold at $1,175 — that the move past the 200-day moving average was a bullish signal that could lead to a breakout.
The SPDR Gold Trust ETF (GLD, $118.36, down $070) was just north of $112 ahead of last Monday’s open, and it reached a peak of $120.84 on Thursday.
The GLD February 114 calls (GLD160219C00114000, $4.10, down $1.80) that I profiled last Monday were trading for $1 ahead the open that day, and they fell 30% on Friday. These calls peaked north of $6 last Thursday and are still up over 300%. Although this wasn’t an official trade for the portfolio, take profits this morning if you haven’t already done so.
The GLD March 116 calls (GLD160318C00116000, $4.55, down $0.95) were trading for $1.50 and are still showing a gain of over 200%. Same deal here — take profits today if you are in the trade.
For new subscribers, my 10-year chart for the Nasdaq from last February showed that the 4,500 level needed to hold throughout 2015. When this level was breached in August, I knew that the bulls would struggle to set new all-time highs again for a while.
I have been extremely accurate with my bullish market predictions over the past four years. I said that the Nasdaq would challenge 5,000 well ahead of time, while most Wall Street pundits and the media said it would never happen again.
As far as this week, I’m looking for the Nasdaq to recover 4,500, which is a level that needs to hold for a continued rally. I will also be highlighting the 10-year charts in the next week or two, along with my year-end predictions on where I think the market will be trading.
From desk to press, futures look like this: Dow (+173); S&P 500 (+20); Nasdaq 100 (+57); Russell (+12).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 17-2 (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.
Bank of America (BAC, $11.95, up $0.79)
BAC March 13 calls (BAC160318C00013000, $0.32, up $0.13)
Entry Price: $0.40 (2/9/2016)
Exit Target: $0.80
Stop Target: None
BAC April 14 calls (BAC160415C00014000, $0.27, up $0.08)
Entry Price: $0.30 (2/9/2016)
Exit Target: $0.60
Stop Target: None
Action: Shares traded to a high of $12.03 on Friday. Resistance is at $12-$12.25. Short-term support is at $11.75-$11.50, with risk to $11 on a close below the latter.
Rambus (RMBS, $11.97, up $0.10)
RMBS March 13 calls (RMBS160318C00013000, $0.16, down $0.04)
Entry Price: $0.35 (2/2/2016)
Exit Target: $0.70
Stop Target: None
Action: Resistance is at $12-$12.25. Support is at $11.75, followed by $11.65-$11.50 and the 50- and 100-day moving averages.
Opko Health (OPK, $7.89, down $0.11)
OPK March 7 puts (OPK160318P00007000, $0.35, flat)
Entry Price: $0.35 (1/25/2016)
Exit Target: $0.70
Stop Target: None
Action: Resistance is at $8-$8.25. Support is at $7.50. The “death cross” that formed earlier this month is still signaling lower lows.
Garmin (GRMN, $34.36, up $0.52)
GRMN February 30 puts (GRMN160219P00030000, $0.39, down $0.08)
Entry Price: $0.98 (1/20/2016)
Exit Target: $0.70
Stop Target: None
Action: Earnings are due out on Wednesday, Feb. 17, and these options expire on Friday.
We will need a 15%-20% plunge to $29 and below to break even on the trade and possibly make a profit. A good earnings report and a run past $36 will crush the position.
If shares clear $35 ahead of the announcement, I could close half or all of the trade to save the remaining premium.
Editor and Chief Options Strategist