In This Issue:
Dear Momentum Options 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.
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.
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.
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.
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.
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 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.”
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 Pre-Market Update:
“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.
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.
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 (-36); S&P 500 (-7); Nasdaq 100 (-16); Russell (-4).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 23-4 (85%). 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.
Green Dot (GDOT, $21.84, up $0.30)
GDOT June 22.50 calls (GDOT160617C00022500, $1.54, up $0.24)
Entry Price: $0.70 (2/24/2016)
Exit Target: $1.75-$2.10 (Limit Order on first half at $1.75, raise to $2.10)
Stop Target: $1.05, raise to $1.20 (Stop Limit)
Action: Raise the Limit Order on the first half of the GDOT June 22.50 calls from $1.75 to $2.10.
Also, raise the Stop Limit from $1.05 to $1.20 to protect profits.
Shares traded to a 52-week high of $21.99 on Friday. I mentioned that a close above $21.75 could lead to a quick run to $22-$24. Support has moved up to $21.50-$21.
Bank of America (BAC, $13.54, up $0.04)
BAC April 14 calls (BAC160415C00014000, $0.38, flat)
Entry Price: $0.30 (2/9/2016)
Exit Target: $0.60
Stop Target: $0.35, lower to $0.33 (Stop Limit)
Action: Lower the Stop Limit from $0.35 to $0.33. That will give the trade a little wiggle room at this morning’s open.
Friday’s peak reached $13.89. Resistance is at $13.50-$13.75. Continued closes above $13.75 could lead to a run towards $14-$14.25 and the 50-day moving average. Support is at $13.25-$13.
CVS Health (CVS, $99.28, down $0.10)
CVS April 105 calls (CVS160415C00105000, $0.43, down $0.02)
Entry Price: $0.45 (3/4/2016)
Exit Target: $0.90
Stop Target: None
Action: Resistance is at $100 and the 200-day moving average. A close above this level should lead to a run towards $102-$104. Support is at $98, followed by $96.50 and the 100-day moving average. A mini “golden cross” is in the process of forming, with the 50-day moving average on track to clear the 100-day moving average. If shares trade to $106 by mid-April, technically, these options will easily double from current levels.
Hertz Global Holdings (HTZ, $10.47, up $0.46)
HTZ April 11 calls (HTZ160415C00011000, $0.65, up $0.13)
Entry Price: $0.55 (2/26/2016)
Exit Target: $1.10
Stop Target: None
Action: The company recently announced earnings of $0.05 a share on revenue of $2.41 billion. Analysts were looking $0.04 a share on revenue of $2.52 billion. This follows three previous quarters during which HTZ posted a $0.03 miss, a $0.05 beat and a $0.05 miss, respectively.
I’m hoping that the company has turned the corner with its cost-cutting and margin-improvement programs. The move from the 52-week high of $22.68 to a recent 52-week low of $6.95 in early February was an extreme selloff, and it was a little overdone. If shares can trade past $12.10, technically, by mid-April, these options will easily double from our entry price.
Shares traded to a high of $10.67 on Friday, but, more importantly, they closed above their 50-day moving average. I mentioned that a run to $12-$13 could come on continued short-covering, with the 100-day moving average at $13.50. Support has moved up to $10-$10.25.
You can read my detailed write-up in the March 3 Mid-Market Update.
Oracle (ORCL, $37.89, flat)
ORCL April 40 calls (ORCL160415C00040000, $0.41, up $0.01)
Entry Price: $0.40 (2/22/2016)
Exit Target: $0.80
Stop Target: None
Action: Friday’s high tapped $38.16. Resistance is at $38.25 and the 200-day moving average. A close above this level should lead to a trip to the low $40s. Support is at $37.50-$37 and the 100-day moving average.
You can read my detailed write-up in the Feb. 23 Pre-Market Update. Earnings are due out in the next week or two, and I will provide full coverage once a date is announced.
Editor and Chief Options Strategist