In This Issue:
Dear Momentum Options Subscriber,
The market finished mixed on Friday, but the bulls got their second-straight weekly win despite the choppy action. The current rally has also helped to erase much of February’s losses, although the bears still have a little piece of the pie, as tech is still in the red.
The Dow lost 57 points, or 0.3%, to close at 16,639 on Friday. The blue-chips traded to a high of 16,795 on the open, with resistance at 16,800 holding by a nickel. A move above this level will likely lead to a run towards 17,000 and the 100-day moving average. The late-day fade to 16,623 held fresh support at 16,600 and the 50-day moving average. Backup support is at 16,400-16,350.
The S&P 500 slipped 3 points, or 0.2%, to end at 1,948. The index reached a peak of 1,962 shortly after the opening bell but failed to clear short-term resistance at 1,970-1,975. A move above this level will get 2,000 and the 100-day moving average in play. Shaky support is at 1,945-1,940 and the 50-day moving average, with additional help at 1,925.
The Nasdaq climbed 8 points, or 0.2%, to finish at 4,590. Tech cleared short-term resistance at 4,600 following the morning trip to 4,618. Upper resistance is at 4,650 and the 50-day moving average, with a shot at 4,700 if those levels are cleared. Support is at 4,550, with 4,500 serving as backup.
The Russell 2000 added 5 points, or 0.5%, to settle at 1,037. The small-caps tested a high of 1,039 but fell shy of 1,040-1,045 and the 50-day moving average. Additional resistance remains at 1,050-1,060. Near-term support is at 1,025-1,020, which are levels that need to hold this week on any pullback.
The S&P 500 Volatility Index ($VIX, 19.81, up 0.70) gained nearly 4% despite trading to a low of 18.46. Support at 18.50 and the 200-day moving average held and, while these levels are important, the bulls still need to get below 17.50 to confirm higher highs into mid-March. The bears will be looking to reclaim 20 today, but there is wiggle room to 22-22.50 and the 50-day moving average before the bulls need to get nervous again.
Today is the last trading day of February, and the month is still up for grabs. The V-shaped recovery off of the lows surprised Wall Street and the short-sellers, but we were well prepared for the rebound. However, the slight gains the bulls do have aren’t safe given the volatility that remains.
The Dow is up 173 points for February, while the S&P 500 has gained nearly 8 points. The Russell 2000 has added roughly 2 points, and the Nasdaq is down 23 points. The blue-chips got a rare Monday win last week, and another positive close by some of the Dow leaders should help the bulls clinch the month. If tech can continue to make higher highs today and for the rest of the week, there is a good chance that the rebound stretches into mid-March.
We received great clues that the market would rally off of the “double bottom” formed earlier this month, which you can see from the charts in the Feb. 16 Pre-Market Update. At the time, I talked about the need for the major indices to clear the blue downtrend lines I had highlighted. I also predicted that, once those lines were cleared, a run towards the major moving averages would come.
The Dow and S&P 500 are currently holding their 50-day moving averages, while the Nasdaq and Russell 2000 are not quite there. If tech and the small-caps can lead any type of rally past their 50-day moving averages starting this week, there is a good chance that the 100-day moving averages will be challenged.
March is typically a bullish month for the market, as the S&P 500 has gained an average of 1.6% during the month over the past 20 years. The index has traded higher two-thirds of the time over this period, but these instances have been rather volatile. The beginning of the month tends to be stronger than the back half as fund managers square up their quarterly books.
While I have talked about the current rally lasting into mid-March, I have also mentioned that February is when I like to make my year-end market predictions. Now, I want to show my chart work on the Nasdaq from the last few years to first show how we got to where we are and where we could be going.
The Nasdaq came into 2013 at 3,019, and I talked about a possible push past 3,500 if tech could deliver good earnings to start the year. My raised price target of 4,400-4,500 would have to wait, as the index closed at 4,176, which easily exceeded my original expectations.
The Nasdaq came into 2014 at 4,176, and my February forecast called for a surge to 4,800-5,000. At the time, none of the slick-talking pros were predicting a run to the previous all-time high of 5,134. The index closed 2014 at 4,726.
Although my 2014 targets weren’t met, I knew that the Nasdaq would trade to all-time highs at some point in 2015. I had higher price targets of 5,500-6,000 for tech on continued strength, but that was based on one caveat. The index did trade to an all-time high of 5,231.94 last July before tumbling below the 4,500 level in August. Once this level was breached, I warned that a market peak had probably been reached.
The Nasdaq closed last year at 5,007, but I have repeatedly said that the bulls will need to hold the 4,500 level going forward. For now, they are.
It only took a few minutes to get an instant snapshot of the technical setup for the major indices, as the 10-year charts are showing that “rounding tops” are in the process of forming across the board.
A rounding top pattern can occur in a stock or an index, and it usually indicates a bearish development. A rounded top looks like an inverted “U” on a chart, which usually signals the end of an uptrend and the possible start of a major downtrend. Rounded top patterns are an indication of weakness and provide an opportunity to short a stock or the market. As a side note, rounding bottom patterns are the just the opposite and look like a normal “U” on a chart.
Rounding tops form following a strong rally upwards that then consolidates for an extended period. This forms the start of the rounded top before an eventual breakdown below the neckline, or support, of the trading range.
To figure out how low a price can go once the trading range is breached, technical traders like to take the depth of that range and extend that distance down from the neckline, or the bottom of the trading range. While this may be hard to picture in your head, the bottom line is that the 10-year monthly major moving averages will likely be tested at some point this year.
Since I have been highlighting the Nasdaq’s chart over the past few years, let’s start there. The upside appears to be limited to 5,000-5,250, which would represent gains of 9%-14%. That’s asking a lot of the bulls in an election year, but it’s possible. The neckline for the Nasdaq is at 4,250, which will likely trigger if the index fails at 4,500 again. From there, it will be important for the 4,000 level to hold. A test to 3,250 and the 100-month moving average would represent a loss of 29% from current levels.
The neckline for the Dow is at 16,000, which could come into play on another break below 16,400-16,350. A close below 15,800 and the 50-month moving average could spell trouble to 13,250-13,000. This would represent a loss of 20%-22% from current levels. The upside appears to be limited to 8%-10% (18,000-18,250).
The S&P 500 has an outside shot of trading back to 2,100-2,150 at some point in 2016, which would represent a return of 8%-10%. The neckline for the index is at 1,800. If the bears can get continued closes below this level, there is a good chance that a correction to 1,500-1,450 could come. This would represent losses of between 23%-26%.
The neckline for the Russell 2000 is at 1,100, which is a level the bulls are struggling to reach. The continued closes below the 50-month moving average at 1,045 are bearish signals. The 100-month moving average is at 853, which would represent a selloff of 18% from current levels. The bulls first need to recover the 1,050-1,060 levels to have a chance at reaching 1,100, which would represent a gain of 5% from current levels. It would be hard to argue that the index could trade to 1,200-1,250 if the 1,100 level does come into play, as it would represent a gain of 15%-20%. It is possible, but so many things would have to go right for the bulls to post these kinds of advances given the current environment.
Although charting is never an exact science, the aforementioned upside and downside targets help me keep the year in focus. I knew last August when the Nasdaq breached 4,500 that the multi-year bull run might be taking a temporary or longer-term breather. The failed Christmas rally, a breach of the December lows and a lower January, along with an election year gave me very good clues that the bears would be sticking around in 2016.
The good news is that I have had great success playing bear markets, so the last thing I want you to do is panic. I often tell people you can make just as much money in a down-market as you can in up-markets.
However, most professional money managers don’t know how to deploy a strategy for their clients in weak markets and often blame their failures on a pullback or correction. Not me — I’m licking my chops for a test to the 100-month moving averages. For now, however, the near-term outlook looks bullish, but we have great clues to remind us when to go “short.”
From desk to press, futures look like this: Dow (-28); S&P 500 (-3); Nasdaq 100 (-12); Russell (-2).
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.
Whole Foods Market (WFM, $31.10, up $0.24)
WFM April 33 calls (WFM160415C00033000, $0.58, up $0.11)
Entry Price: $0.54 (2/26/2016)
Exit Target: $1.10
Stop Target: None
Action: Shares closed just below the 50- and 100-day moving averages on Friday after trading to a high of $31.45. A move above $31.50-$32 should lead towards a possible push at $33-$34 and the 200-day moving average. Short-term support is at $30.50-$30.
The company recently announced better-than-expected earnings of $0.46 a share on revenue of $4.83 billion. Analysts had expected $0.40 a share on revenue of $4.81 billion. This follows two quarters where it missed expectations by $0.05 and $0.02, respectively.
The suits-and-ties were split after the earnings announcement, with both bullish and bearish comments crossing the tape. Oppenheimer and SunTrust kept their “Outperform” and “Buy” ratings on the stock, with both price targets remaining at $38. Another brokerage firm kept its “Neutral” rating and $27 price target on WFM despite the earnings beat, saying its sales outlook remains uncertain. And, finally, with shares just above $30 mid-month, Wells Fargo initiated coverage of the stock with a “Market Perform” rating and a $27-$28 price target.
Shares are down nearly 50% from their 52-week high of $57.08 after bottoming at a 52-week low of $28.07 earlier this month.
It is too early to say that a “turnaround” is in store for Whole Foods, as the organic food market is a crowded space. However, the company remains one of the best brands in the industry and is slated to open a new chain of stores called 365.
Each 365 store will have a different mix of vendors aimed to attract millennial shoppers, and they will operate independently of Whole Foods. Los Angeles will be the first city to get a 365 store in May, and I will be eager to see how they perform.
In the meantime, with improving fundamentals and a bullish chart, I’m looking for shares to continue their rise to the mid-$30s. If shares are above $34 come mid-April, these options will easily double from current levels, which is where we can start locking in profits.
Green Dot (GDOT, $20.87, up $0.17)
GDOT June 22.50 calls (GDOT160617C00022500, $1.20, up $0.15)
Entry Price: $0.70 (2/24/2016)
Exit Target: $1.75-$2.10 (Limit Order on first half at $1.75)
Stop Target: $0.80 (Stop Limit)
Action: Friday’s high tapped $21.04. Resistance is at $21 and the 52-week high of $21.62. A move above these levels could lead to a blue-sky breakout towards $22-$24. Support is at $20.25-$20.
A mini “golden cross” has formed, with the 50-day moving average crossing above the 100-day moving average last week. An official golden cross is in the processing of forming with the higher 200-day moving average. These are very bullish signs for continued strength in the stock.
Oracle (ORCL, $36.96, down $0.33)
ORCL April 40 calls (ORCL160415C00040000, $0.34, down $0.04)
Entry Price: $0.40 (2/22/2016)
Exit Target: $0.80
Stop Target: None
Action: Support is at $37-$36.50 and a stretched 100-day moving average. Resistance is at $37.50-$38.
You can read my detailed write-up in the Feb. 23 Pre-Market Update. Earnings are due out in a few weeks.
Bank of America (BAC, $12.84, up $0.52)
BAC March 13 calls (BAC160318C00013000, $0.28, up $0.11)
Entry Price: $0.40 (2/9/2016)
Exit Target: $0.80
Stop Target: None
BAC April 14 calls (BAC160415C00014000, $0.20, up $0.08)
Entry Price: $0.30 (2/9/2016)
Exit Target: $0.60
Stop Target: None
Action: Shares made a nice recovery last week, with Friday’s high reaching $12.95. Resistance is at $13, and a move above this level should get our option trades back into positive territory. Support has moved up to $12.75-$12.50.
Rambus (RMBS, $12.98, up $0.01)
RMBS March 13 calls (RMBS160318C00013000, $0.36, down $0.03)
Entry Price: $0.35 (2/2/2016)
Exit Target: $0.70
Stop Target: None
Action: Resistance is at $13-$13.25. Support is at $12.75-$12.50 and the 200-day moving average.
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 out after the closing bell today. I will exit the trade on Tuesday if shares clear $10, but I’m hoping for an earnings miss and a selloff to $7 — Continue to hold the second half.
Editor and Chief Options Strategist