In This Issue:
Dear Momentum Options Subscriber,
The market started the holiday-shortened week on a good note last Tuesday, as the bulls recovered major resistance following the three-day weekend. The Dow Jones Industrial Average and S&P 500 also enjoyed their first three-session win streaks of the year following the rally that continued into Wednesday’s close.
Thursday’s slight pullback held fresh support, and volatility also fell below major support levels, both of which were good signs. Friday’s mixed session was also a slight relief for Wall Street, as the market wrapped up its best week of the year.
The Dow dropped 21 points, or 0.1%, to settle at 16,391 on Friday. The blue-chips languished in negative territory throughout the session, with the low checking in at 16,278. Support at 16,400-16,350 was stretched but held into the closing bell. There is risk to 16,200-16,000 on a pullback and close below those support levels. Resistance remains at 16,600 and the 50-day moving average.
The S&P 500 fell just a fraction of a point, or 0.0%, to finish at 1,917. The index traded to a low of 1,902 on the open, with support at 1,900 holding. There is risk to 1,880-1,875 on a close below this level. The bulls sniffed positive territory ahead of Wall Street’s lunch break, but the one-point pop to 1,918 failed to clear resistance at 1,920-1,925. A close above the latter should get 1,940-1,950 and the 50-day moving average in play.
The Nasdaq gained 16 points, or 0.4%, to close at 4,504. Tech tumbled to 4,455 shortly after the opening bell, with backup support at 4,450 holding. A move below this level keeps 4,400 in the mix. The bulls pushed a high of 4,513 and held 4,500 for much of the second half of trading. The close back above this level keeps a run towards 4,550-4,600 in play. The 50-day moving average is just below 4,700, which is over 4% away.
The Russell 2000 climbed 5 points, or 0.5%, to end at 1,010. The small-caps tested a low of 998 during the opening weakness, with support at 1,000-990 holding. A close below the latter would be a bearish development that could lead to 975-950 again. Resistance is at 1,020-1,025, followed by 1,040.
The S&P 500 Volatility Index ($VIX, 20.53, down 1.11) was in a slight, steady downtrend throughout Friday’s session and finished just off of its low of 20.52. The early morning spike to 23.44 held upper resistance at 22.50-23.50 and the 50-day moving average. A move below 20-19.50 and the 100-day moving average would confirm continued strength in the market.
In the Feb. 16 Pre-Market Update, I covered the key downtrend lines and trading ranges for the major indices that had been “stretched” going into last week. If you’re a new subscriber, please check them out now. However, for a quick review, the major downtrend lines stood at Dow 16,200, S&P 1,890, Nasdaq 4,450 and Russell 980.
Additionally, the tops of the trading ranges were at Dow 16,600, S&P 1,950, Nasdaq 4,500 and Russell 1,000.
All of the major indices cleared their downtrend lines and regained their prior trading ranges, with tech and the small-caps closing above theirs. Although the broader market slacked, these were very bullish developments and classic signs that a “V-shaped” recovery might be in store.
The financial sector and the 4,500 level on the Nasdaq were my other main focal points going into last week. With tech on the bubble and financial stocks in trouble, both needed to perform well to slow the bears’ momentum.
The Financial Select Sector SPDR ETF (XLF, $20.98, flat) had fallen below $20 during the previous week to $19.53 before holding this level. The index made a mid-week push to $21.20 but still faces a bearish technical setup going forward. The initial damage came from the “death cross” that formed in early January when the 50-day moving average fell below the 200-day moving average.
The death cross confirmed that lower lows would be in play, but it is too early to say that a temporary bottom is in. My initial guess is yes, but, for 2016, the sector will likely set fresh lows in the coming months.
The first areas of resistance are at $21.50-$21.75 over the near term, which are levels that could be challenged this week. A move above $22-$22.25 and the 50-day moving average would confirm additional strength for a possible run at $23-$23.50 and the 100- and 200-day moving averages. A close below $20-$19.50 would be a strong indication to possibly go “short” the sector and financial stocks.
Wall Street finally noticed the action in the transports, as the sector broke above its 50-day moving average. I mentioned in late January that a rebound could be in store, with a possible test to the major moving averages forthcoming.
I mentioned at the time, with the Dow Jones Transportation Average ($TRAN, 7,285, up 1) just below 6,700, that the index had fallen over 1,000 points since late December. The bulls have recovered more than half of the losses since then, along with the 50-day moving average.
The 100- and 200-day moving averages are trying to level out, with short-term resistance at 7,400-7,600. A close above the latter would be a very bullish setup, and the transports could have a shot at reaching 8,000 at some point in March or April. The index will need to hold 7,200-7,150 going forward, as a close below the latter would negate the bullish setup.
One of my favorite ways to play the sector is by watching shares of United Parcel Service (UPS, $97.37, down $0.09) as they trade somewhat in tandem, for the most part. Shares of UPS made a nice move above the 50-day moving average earlier this month but struggled to clear the 100- and 200-day moving averages last week.
The recovery keeps a solid uptrend in play from mid-January, with shares possibly testing $100-$102 over the near term if the bulls can clear and hold $98.25-$98.50. Support at $96 would need to hold on any pullback, and a close below $94.50 would violate the bullish setup.
Bullish traders could target the UPS March 100 calls (UPS160318C00100000, $0.88, down $0.09) if shares continue to show strength and hold support on any pullback. These call options would easily double if UPS shares are trading near $102 by mid-March. I could add these call options to the portfolio if shares clear $98 this week. If so, I will send out a Trade Alert.
The UPS April 105 calls (UPS160415C00105000, $0.40, down $0.08) would give a bullish trade an additional month to play out, with a breakeven point at $105.40, technically, by mid-April. A double would occur in the options if UPS shares trade above $105.80 over the next seven weeks.
Bearish traders could target March or April put options if shares do fall below $94.50 in the coming weeks. The UPS March 92.50 put (UPS160318P00092500, $0.75, up $0.05) is an option to play weakness, and it would double if shares of UPS retest $91.
The development in the transports is an additional bonus that will help or hurt market sentiment going forward.
The Monday/Friday closes are signaling a possible trading range before another major leg up or down. I like to keep track of the weekly opens and closes to help determine if money is flowing in or out of the market.
The Dow has closed lower in five of the past six Monday sessions since late December. In all fairness, the market has been closed on Mondays twice this year, but this trend needs to improve.
As far as Fridays, the Dow had finished higher in three of the past four, before the 21-point dip ahead of the weekend. This had reversed a previous four-Friday slide from early December through mid-January.
Up-Monday/Friday closes may signal that cash is moving back into the market. Lower finishes could be a hint that money is being pulled out of the market. Mixed closes suggest trading ranges. While this system isn’t perfect by any means, it also helps me to determine volatility.
This week, there could be a slight trading range developing following the bulls’ massive rebound off of the lows. Support and backup help is still shaky and will need to hold on any bear attacks. If so, higher highs could be in store through mid-March, and the upper major moving averages could come into play.
From desk to press, futures look like this: Dow (+173); S&P 500 (+20); Nasdaq 100 (+45); Russell (+10).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 20-3 (87%). 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, $12.13, down $0.11)
BAC March 13 calls (BAC160318C00013000, $0.16, down $0.05)
Entry Price: $0.40 (2/9/2016)
Exit Target: $0.80
Stop Target: None
BAC April 14 calls (BAC160415C00014000, $0.11, down $0.06)
Entry Price: $0.30 (2/9/2016)
Exit Target: $0.60
Stop Target: None
Action: Short-term support is at $12. A close below this level could get $11.75-$11.50 in play again. Resistance is at $12.25-$12.50.
Rambus (RMBS, $12.41, down $0.03)
RMBS March 13 calls (RMBS160318C00013000, $0.21, down $0.02)
Entry Price: $0.35 (2/2/2016)
Exit Target: $0.70
Stop Target: None
Action: Resistance is at $12.50-$12.75 and the 200-day moving average. Support is at $12.25-$12, followed by $11.75 and the 50- and 100-day moving averages.
Opko Health (OPK, $8.82, up $0.09)
OPK March 7 puts (OPK160318P00007000, $0.12, flat)
Entry Price: $0.35 (1/25/2016)
Exit Target: $0.70
Stop Target: None
Action: This position wasn’t intended to be an earnings trade, but it has become one, as the company is scheduled to report its latest numbers next Tuesday, March 1.
Opko topped estimates by $0.25 last quarter after missing expectations by $0.09, $0.26 and $0.12, respectively, during the prior three quarters. Wall Street is currently forecasting that the company will break even and report earnings of $0.00 a share on revenues of $286.5 million.
Resistance is at $9 and the 50-day moving average. A move above this level could lead to $9.25-$9.50 and the 100-day moving average. Support is at $8.50-$8.25.
Editor and Chief Options Strategist