In This Issue:

Dear Momentum Stocks Weekly Subscriber,

The bulls wrapped up a solid week on Friday as March got off to a strong start, and the major indices have either cleared or are challenging key psychological levels that could lead to further strength.

The major moving averages are also being challenged, and volatility has dropped to its lowest levels of the year. The “V-shaped” rally has also cut 2016’s losses in half, which has Wall Street wondering if the rebound has come too far too fast.

The Dow gained 62 points, or 0.4%, to end at 17,006 on Friday. The blue-chips traded down to 16,898 on the open, with rising support at 16,900-16,800 holding. There is risk to 16,600-16,500 and the 50-day moving average on a close below the latter. The intraday high of 17,062 cleared the 100-day moving average, and the close above 17,000 was the first since Jan. 5. I talked about near-term resistance at 17,000-17,200 and the 200-day moving average coming into play this month, and a move above the latter could lead to 17,350-17,400.

INDU

The S&P 500 popped a 6-pack, or 0.3%, to finish at 1,999.99. The index slipped to a low of 1,986 but easily held rising support at 1,985-1,975. A move below 1,970 could lead to a backtest to 1,950-1,940 and the 50-day moving average. The index rebounded to 2,009 and held its 100-day moving average despite just missing the 2,000 level at the close. I talked about upper resistance at 2,010 being the key to a shot a 2,020-2,025 and the 200-day moving average if cleared. Additional hurdles above 2,025 are at 2,040-2,050, which is where I expect that a short-term top might be reached.

SPX

The Nasdaq added 9 points, or 0.2%, to settle at 4,717. Tech made another backtest to support at 4,675-4,650 following the morning trip to 4,687. There is risk to 4,625-4,600 and the 50-day moving average on a move below the latter. Resistance at 4,750-4,800 held during the intraday trip to 4,746. A close above the latter would get 4,825-4,850 and the 100-day moving average in play. The 200-day moving average is just below 4,900, which is roughly 4% away.

COMPQ

The Russell 2000 climbed nearly 6 points, or 0.6%, to close at 1,081. The small-caps led the mini rally for much of the week and closed higher for a fourth-straight session. The slight dip to 1,073 held rising support at 1,175-1,170. A close below 1,150-1,145 would be a bearish development, which is when we would need to start preparing to go short. I said late last week that a close above 1,080 would be a very bullish signal that should get 1,100 and the 100-day moving average back on the radar. The 200-day moving average is another 5% away from there, or 7% away from current levels.

RUT

The S&P 500 Volatility Index ($VIX, 16.86, up 0.16) made a move towards support at 15 as the bulls pushed a low 16.05. There is a chance that the VIX will trade to 13.50-12.50 on another leg higher. The intraday bounce failed to clear resistance at 17.50-18.50 and the 200-day moving average. I will remain bullish over the short-term as long as 19.25-20 and the 100-day moving average hold. A breach of 21.75-22.50 and the 50-day moving average would likely signal that a short-term market top is in, with another possible selloff or correction in the works.

VIX

Although the bears won the month of February, the bulls had a little success while building momentum heading into March. The Dow gained 50 points in February, while the S&P 500 slipped 8 points. The Nasdaq gave back 56 points, and the Russell 2000 declined a little more than one point. The Dow win snapped a two-month losing streak, but the other three major indices fell for a third-straight month.

The rebound off of the February lows surprised Wall Street — but not me. These were my thoughts heading into last week:

“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 Issue. 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.”

By the numbers, the Dow has rallied 1,503 points, or 10%, from its February intraday low of 15,503, while the S&P 500 has surged 190 points, or 10%, since bottoming at 1,810. The Nasdaq has zoomed 507 points, or 12%, off of a low of 4,209, and the Russell 2000 has advanced 138 points, or 15%, after kissing an intraday low of 943 on Feb. 11.

Year-to-date, the Dow is down 419 points , or 2%, and the S&P 500 has fallen 44 points, or 2%. The Nasdaq is in the red by 290 points or 6%, and the Russell 2000 is lower by 54 points, or 5%.

We were well prepared for the rebound rally off of the February lows, as a number of bullish clues came into play over the past few weeks.

One of the earliest clues that showed that a temporary bottom was forthcoming was the action in the transports. Here were my thoughts from the Feb. 22 Issue:

“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.”

The Dow Jones Transportation Average ($TRAN, 7,651, up 49) closed above its 100-day moving average for the second-straight session. The 200-day moving average is now within striking distance, and a close above this level would likely confirm higher highs for the Dow and for the market in general.

TRAN

One aspect of the Dow theory says that when there is strength in the transports, it tends to confirm broader market strength. The Dow Jones, or the blue-chip stocks, are mostly “industrial” stocks, and they tend to trade in tandem with the transports.

Although gross domestic product (GDP) grew only 1% last quarter, transportation companies could be shipping more goods, which reflects a growing economy. I doubt this is the case, but it is hard to argue with price action. We will know soon if and when the 200-day moving average is cleared. The Dow can continue to move higher after a potential peak in the transports, but it would soon follow on the pullback.

The Financial Select Sector SPDR (XLF, $22.28, up $0.09) has also been in a strong uptrend after bottoming near the $19.50 level in mid-February. Last week’s close above the 50-day moving average was a bullish signal that a run towards $23-$23.50 and the 100- and 200-day moving averages could be coming. Support has moved up to $22-$21.75, and a close below the latter would be a warning sign.

XLF

The Monday/Friday closes are still showing slightly bearish signals, and that worries me slightly. The Dow has fallen during five of the seven Mondays in 2016, including four of the past five. Last Friday’s Dow win snapped a two-session slide, but the index has been down during three of the past five Fridays.

I would like to see continued higher Monday/Friday closes as a sign that money is moving into the market. Weaker closes suggest that money is moving out of the market and onto the sidelines. Mixed Monday/Friday closes can suggest trading ranges and high volatility.

With the 100-day moving averages in play and the 200-day moving averages slightly above them, it appears that the continued market momentum we have been riding could last for another week or two. I have been saying since mid-February that a rebound rally could last through mid-March and that the VIX could test the 15 level. So far, so good — but, remember, we have already squeezed a lot gains out of this juicy melon.

From there, higher highs are possible, and the major indices could get back into positive territory for the year. Tech and the small-caps might struggle to reach their break-even points, so I will be watching them more carefully to see whether a potential top or continued rally is still in store. For now, we will continue to ride the higher highs while waiting for clues of a market top and lower lows down the road.

From desk to press, futures look like this: Dow (-49); S&P 500 (-8); Nasdaq 100 (-20); Russell (-4).

Chapter 1. Momentum Stocks Weekly Play List

All prices given in this update are current as of Mar. 4, 2016. I hereby disclose that I will be participating in the following trade(s).

The Momentum Stocks Weekly Closed Trade Track Record is 1-2, for a 33% win rate for 2016 (145-27, or 84% win rate, overall since the start of 2011)

View the entire list of open and closed trades by clicking here.

 

Hansen Medical (HNSN, $2.52, down $0.08)

Original Entry Price: $4.50 (2/2/2016)

Lowered Price from Selling Options: N/A

Exit Target: $6.00

Return: -44%

Stop Target: $2.00

Action: Support is at $2.50-$2.35 and the 50-day moving average. Resistance is at $2.75-$2.80 and the 100-day moving average.

HNSN

Lattice Semiconductor (LSCC, $5.79, down $0.05)

Original Entry Price: $6.77 (12/29/2015)

Lowered Price from Selling Options: N/A

Exit Target: $9.00

Return: -14%

Stop Target: $3.50 (Stop Limit)

Action: Support is at $5.50-$5.25 and the 50- and 100-day moving averages. Resistance is at $6.

I could sell the LSCC June 7.50 calls (LSCC160617C00007500, $0.40, down $0.05) today or this week to lower the cost basis of the trade, but wait for my signal.

LSCC

Planet Fitness (PLNT, $15.61, up $0.80)

Entry Price: $17.85 (9/16/2015)

Lowered Price from Selling Options: N/A

Exit Target: $22.00

Return: -13%

Stop Target: $12.00

Action: Fresh resistance is at $16-$16.50, and the close above the 100-day moving average was bullish. Support is at $15.25-$15 on a move below the 50-day moving average.

You can read my latest write-up on PLNT in the Nov. 16 Issue.

PLNT

Rave Restaurant Group (RAVE, $5.39, up $0.04)

Original Entry Price (First Position): $13.92 (7/9/2015)

Lowered Price from Selling Options: N/A

Exit Target: $20.00

Return: -61%

Stop Target: $4.00

 

Original Entry Price (Second Position): $11.70 (8/17/2015)

Lowered Price from Selling Options: N/A

Exit Target: $13.00+

Return: -54%

Stop Target: $4.00

Action: Resistance is at $5.50-$5.75 and the 50-day moving average. Support $5.25-$5.

You can read my most recent write-up on the company in the Dec. 24 Issue.

RAVE

Rigel Pharmaceuticals (RIGL, $2.42, down $0.05)

Original Entry Price: $3.51 (6/2/2015)

Lowered Price from Selling Options: N/A

Exit Target: $4.00-$5.00

Return: -31%

Stop Target: $2.00 (Stop Limit)

Action: Resistance is at $2.50-$2.60. Support is at $2.35-$2.25.

RIGL

Psychemedics (PMD, $13.19, up $0.19)

Original Entry Price: $15.67 (5/5/2015)

Lowered Price from dividends: $15.07

Exit Target: $15.75 (Limit Order)

Return: -14%

Stop Target: $7.75 (Stop Limit)

Dividend Yield: 4.7%

Action: Resistance is at $13-$13.50. Support is at $12.50-$12.

The recent dividend of $0.15 a share lowered our cost basis to $15.07. This was the fourth dividend payment on our position.

PMD

Huttig Building Products (HBP, $3.62, up $0.18)

Original Entry Price: $4.00 (8/13/2014)

Lowered Price from Selling Options: N/A

Exit Target: $6.00+

Return: -10%

Stop Target: $2.00 (Stop Limit)

Action: Resistance is at $3.70-$3.80. A move above the latter could lead to a run past $4. Support is at $3.50-$3.40 and the 200-day moving average.

HBP

Rambus (RMBS, $13.27, down $0.21)

Original Entry Price: $17.83 (11/14/2011)

Lowered Price from Selling Options: $16.38

Exit Target: $15.00+

Return: -19%

Stop Target: $9.00

Action: Resistance is at $13.50-$13.75. Support is at $13, followed by $12.75-$12.50 and the 200-day moving average.

RMBS

Trades on Hold (2): These are trades that are still open in the portfolio but are down from the original recommended price. These trades are on “hold” and are not a buy until I bring back coverage of the stock. This means I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when a trade closes. I do not recommend adding to these positions or opening new positions.

Zynga (ZNGA, March 2014) — Continue to hold.

Relypsa (RLYP, January 2015) — Continue to hold.

Trade on!

Signed

Rick Rouse
Editor
Momentum Stocks Weekly