Dear Momentum Options Subscriber,
Tuesday’s backtest to fresh support was nearly a given following the broader market’s failed attempt to clear the 50-day moving averages on Monday. How the bulls respond today will be crucial, as the last week of February is usually a bearish period of time.
The Dow dropped 188 points, or 1.1%, to close at 16,431. The blue-chips traded in negative territory throughout the session, with the low reaching 16,403. Support at 16,400-16,350 held, but there is risk to 16,200-16,000 on continued weakness. Resistance is at 16,600-16,650 and the 50-day moving average.
The S&P 500 fell 24 points, or 1.3%, to end at 1,921. The index opened at 1,942 and made a steady decline to 1,919 ahead of the closing bell. Support is at 1,925-1,920, but there is risk to 1,900-1,875 if those levels are breached. Resistance remains at 1,940-1,950.
The Nasdaq tanked 67 points, or 1.5%, to settle at 4,503. Tech opened at 4,550, which is now resistance after serving as shaky support, before tumbling to 4,500 in the final minutes of trading. I have been mentioning this level over and over again recently due to its importance. A move below this level will likely get 4,450-4,400 back in play.
The Russell 2000 declined 9 points, or 0.9%, to finish at 1,012. The small-caps opened slightly lower at 1,021, with upper resistance at 1,025-1,025 easily holding. The bulls held the upper levels of support at 1,010-1,000, and backup help is at 990 on a move below the latter.
The S&P 500 Volatility Index ($VIX, 20.98, up 1.60) jumped 8% and reached a peak of 21.16 intraday. The good news is that the bulls held near-term resistance at 22.50-23.50. The bad news was the close back above 20.
As I mentioned in Monday’s Pre-Market Update, I will be including a new question and answer section in each Wednesday’s Pre-Market Update that will give you the opportunity to ask me questions about the market and our current trades. This section, called Momentum Q&A, is located at the bottom of this update, so be sure to check that out after you read through our current trades.
As a reminder, the SEC’s guidelines prohibit me from answering any questions about securities that are not currently on our Momentum Options buy list or from providing individualized trading advice or recommendations for any specific subscriber or portfolio.
I encourage you to send in any questions that I can help with, particularly those that may benefit the broad Momentum Options audience. If you have a question, chances are there are a handful of other subscribers who may have the same one! To submit your questions, simply send your messages to firstname.lastname@example.org, and I will do my best to address them every Wednesday morning.
From desk to press, futures look like this: Dow (-151); S&P 500 (-17.5); Nasdaq 100 (-53); 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.
Oracle (ORCL, $36.55, down $0.56)
ORCL April 40 calls (ORCL160415C00040000, $0.25, down $0.09)
Entry Price: $0.40 (2/22/2016)
Exit Target: $0.80
Stop Target: None
Action: Tuesday’s low touched $36.38. Support is at $36.50-$36. Resistance is at $37.50-$38.
You can read my detailed write-up in the Feb. 23 Pre-Market Update.
Bank of America (BAC, $12.16, down $0.38)
BAC March 13 calls (BAC160318C00013000, $0.15, down $0.07)
Entry Price: $0.40 (2/9/2016)
Exit Target: $0.80
Stop Target: None
BAC April 14 calls (BAC160415C00014000, $0.12, down $0.03)
Entry Price: $0.30 (2/9/2016)
Exit Target: $0.60
Stop Target: None
Action: Short-term support is at $12.25-$12. Yesterday’s low tapped $12.10. Resistance is at $12.50-$12.75.
Rambus (RMBS, $12.61, up $0.02)
RMBS March 13 calls (RMBS160318C00013000, $0.25, flat)
Entry Price: $0.35 (2/2/2016)
Exit Target: $0.70
Stop Target: None
Action: Shares traded to a high of $12.96 yesterday. Resistance is at $12.50-$12.75 and the 200-day moving average. Support is at $12.25-$12. To break even on the position, shares need to be at or above $13.35 by mid-March. If RMBS can clear and hold $13, a short-covering rally could ensue.
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.
Q: With the Dow respecting resistance at its 50-day moving average are you considering any put option plays to balance out our portfolio? Thank you — J.M.
A: The market is in a precarious position this week as you correctly pointed out. I talked about a mini-trading range possibly taking shape this week as well as the chance of a pullback. The Dow is trying to build a new floor of support above 16,350-16,400, so we need to watch this action first. If the index falls below 16,200-16,000, I have put options on my watch list that could become official trades. However, I have also talked about a continued rally into mid-March, and I have call options ready as well.
The portfolio is light at the moment, as there are only five open positions. At certain times in a well-defined, trending market, I could have as many as 10-15 open positions. During trading ranges and volatile markets, I tend to keep the number of open positions under 10. We did well last week by cashing out a number of call option trades on the rally. Right now, we just need to be patient and let the action come to us.
Q: What are you expecting for our two Bank of America (BAC) positions? Should we think about exiting one of them to reduce our risk in the name? — J.S.
A: It has been a frustrating two weeks for our BAC trades, and I would like to see near-term support hold at $12 this week. However, if shares fall below $11.75-$11.50, I could be forced to close at least half of the March options. If there is continued weakness into next week, and in the financial sector in general, I could be forced to close both positions.
The financial stocks need to participate in a prolonged rally or they will slow the overall momentum. Although the trade is down, I’m still hopeful we can turn a profit with BAC.
Q: I’ve noticed that we tend to hold on to our losing trades longer than our winning trades. Can you please explain why that is? Thanks — G.R.
A: Fortunately, the portfolio hasn’t had many losing trades this year, as we are off to a strong start with a 20-3 track record.
Determining when to cut a losing trade is always a hard decision, especially if the technical picture still favors the position. There have been numerous situations in which option trades that were down over 50% came back, and a lot of that has to do with the amount of time left in the trade. RMBS is a current trade that has been down and out, but shares continue to set higher highs.
Some of my trades are also catalyst-based, meaning that we are waiting on an earnings announcement or another meaningful news event. If the technical picture doesn’t look like it will improve before the expiration date or the stock didn’t move based on a catalyst, then I usually admit defeat and move on. Sometimes, as you might have noticed with our OPK position, I may close half of the trade if I have an early indication that it is going against us.
Q: How or where can investors find the historical and implied volatility of an equity? Thanks — S.D.
A: Personally, I can view implied volatility data in my brokerage accounts, so you should be able to check via your broker’s options chain. However, not all platforms are the same, so it’s best to check with your broker to see if they offer the features you want to trade with and that make you comfortable.
Editor and Chief Options Strategist