Dear Momentum Options Subscriber,
The bulls continued their rebound rally on Monday as they blasted past more layers of resistance. Volatility settled near its lowest levels of the year, and continued weakness could push the bears further into hibernation.
The Dow jumped 228 points, or 1.4%, to finish at 16,620. The blue-chips opened above 16,400-16,350 at 16,417, and these levels will now serve as short-term support. The close above 16,600 was bullish, but the index fell shy of its 50-day moving average. This is a slight cause for concern, but a move above 16,650 should lead to a run towards 16,800-17,000 and the 100-day moving average.
The S&P 500 surged 27 points, or 1.5%, to close at 1,945. The index opened above and cleared the 1,920-1,925 levels following its intraday climb to 1,946. These levels will now serve as near-term support. The bulls also fell shy of clearing 1,950 and the 50-day moving average, but a move above these levels could lead to a push to 1,975-2,000 and the 100-day moving average.
The Nasdaq added 66 points, or 1.5%, to end at 4,570. Tech split upper resistance at 4,550-4,600 following a steady run to 4,576 throughout the session. A close above the latter would get 4,650-4,700 and the 50-day moving average in play. Support has moved up to 4,550-4,525. Our clue to possibly go short the index will be a break back below 4,500, so keep this in mind.
The Russell 2000 advanced 11 points, or 1.2%, to settle at 1,021. The small-caps also pushed upper resistance at 1,020-1,025, with the top of the range holding on the intraday high. Additional hurdles remain at 1,035-1,040. Support is at 1,010-1,000, but a close below the latter would be a bearish development.
The S&P 500 Volatility Index ($VIX, 19.38, down 1.15) closed below 20 for the first time since the start of February and for only the third time this year. The early-January low on the VIX tapped 19.25, which is a target the bulls will be shooting for. I mentioned that a move below the 100-day moving average would confirm continued market strength, but I’m more worried about 18.25-17.50 and the 200-day moving average. If these levels hold, a short term top might be in, but I have also talked about a possible trading range developing this week. The bears will be on a mission to regain the 20 level as early as possible, but we don’t need to worry about going short until 22.50-23.50 is challenged again.
The positive Monday close on the Dow was a bullish sign, as was the strength shown in the financial and transportation stocks. It is still hard to trust the bulls 100% right now, but these signals were huge. I don’t mind riding shotgun on the vicious rebound, but I’m still watching the rearview mirror for a possible bear attack at some point down the road.
From desk to press, futures look like this: Dow (-2); S&P 500 (-2); Nasdaq 100 (-10); Russell (-2.5).
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.
Oracle (ORCL, $37.11, up $0.33)
ORCL April 40 calls (ORCL160415C00040000, $0.34, up $0.04)
Entry Price: $0.40 (2/22/2016)
Exit Target: $0.80
Stop Target: None
Action: Monday’s high reached $37.49. Resistance is at $37.50-$38. Support is at $37 and the 100-day moving average, followed by $36.50.
These options were heavily traded yesterday, as volume topped 4,000 contracts. This is a possible clue that bullish traders are setting up for an earnings beat when the company reports in mid-March.
Wall Street is expecting Oracle to earn $0.62 a share on revenue north of $9.1 billion. There is a nickel of wiggle room, as the high estimate is at $0.65, while the low number is pegged at $0.60 a share. Revenue estimates run past $9.3 billion, with a low estimate near $9 billion.
The company has topped or matched expectations during three of the past four quarters by $0.03 and $0.01. An earnings miss of $0.08 a share was also posted over the past year.
Although this isn’t an earnings trade, it could become one if we are still in the position next month. The trade was based more on the technical outlook, but it is good to do the homework on both so there are no curveballs or surprises.
Cloud-networking software solutions continue to be big business, and Oracle is one of the leaders in the industry. With tech in a strong uptrend, I wanted to get us into ORCL to play a possible push past $40. I could have gone with the March options, but I wanted to give the trade more time to play out. The regular March options will expire three weeks from this Friday.
I consider options to be in the “danger zone” when they are less than three weeks from expiration, as time premium starts to erode. This is often the time when options can make large percentage moves, so you have to be extra cautious when trading them.
Bank of America (BAC, $12.54, up $0.41)
BAC March 13 calls (BAC160318C00013000, $0.22, up $0.06)
Entry Price: $0.40 (2/9/2016)
Exit Target: $0.80
Stop Target: None
BAC April 14 calls (BAC160415C00014000, $0.15, up $0.04)
Entry Price: $0.30 (2/9/2016)
Exit Target: $0.60
Stop Target: None
Action: Resistance is at $12.50-$12.75. Short-term support is at $12.25-$12.
Rambus (RMBS, $12.59, up $0.18)
RMBS March 13 calls (RMBS160318C00013000, $0.25, up $0.04)
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.
Trades on Hold — other 2016 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.
Opko Health (OPK) March 7 puts (OPK160318P00007000) — Earnings are due to be released next week. Continue to hold the second half of the position.
Editor and Chief Options Strategist