In This Issue:
Dear Momentum Options Subscriber,
The bulls pulled a rabbit out of their hat following Friday’s rally past resistance, as the bears were stifled for the fourth-straight week. The surge off of the mid-February lows continues to play out according to plan, with the run to new highs coming on fresh legs.
The Dow zoomed 218 points, or 1.3%, to finish at 17,213 on Friday. The blue-chips opened above the 17,000 level at 17,014 and held positive territory throughout the session. The close above resistance at 17,200 and the 200-day moving average was a very bullish sign that could lead to 17,400-17,600 over the near term. Fresh support is at 17,150-17,000, and a close back below 16,800 would probably represent a short-term top.
The S&P 500 soared 32 points, or 1.6%, to settle at 2,022. The index opened at 1,994 before easily clearing 2,000 within minutes. This level is now short-term support, and backup is at 1,975. There is additional fluff to 2,050-2,060 this week and next, with a possible top at 2,075. The index is in the middle and is 2% away from either a bullish breakout into April or a massive breakdown into May.
The Nasdaq jumped 86 points, or 1.9%, to close at 4,748. Tech opened at 4,712 and made a key backtest to 4,700 shortly after the open. This level should serve as short-term support, which will be the floor the bulls have to hold going forward. The run to session highs afterwards pushed 4,750, which also represented a bullish clue. Of course, the next major hurdles are at 4,800 and the 100-day moving average. There is a chance that a move towards 4,875-4,900 could come on continued strength. The 200-day moving average is roughly 3% away, which is where we can expect an epic battle.
The Russell 2000 rocketed 23 points, or 2.2%, to end at 1,087. The small-caps led Friday’s rally, and the index went out near its session peak. The powerful move past 1,080 sets up for a bullish push towards 1,100 and the 100-day moving average. This level is just over 1% away, with 1,020-1,025 coming into play if cleared. Support has moved up to 1,075-1,070, and a move below the latter would be a bearish setup that could lead to 1,060-1,055. Last Thursday’s low tapped 1,054. This is very important, as any closes below 1,050-1,040 and the 50-day moving average in the next few weeks or months could be possible signals that the mother of all selloffs is still to come.
The S&P 500 Volatility Index ($VIX, 18.05, down 0.29) fell nearly 9% after trading to a low of 16.28. I have been mentioned that a close back below 17.50 would be a major development that could lead to a possible test to 15. A continued breakout to and past the 200-day moving averages by the major indices could carry the VIX below 13.50-12.50. I can certainly see a test to 15-14.50 coming this month, but I’m not so sure about the two previously mentioned levels. I wouldn’t “aggressively” short the market until the VIX clears 20-22.50 and the 200-day moving average.
The biggest developments from last week were the Dow and S&P 500 clearing and holding their 200-day moving averages for the first time this year. That is the good news (along with the VIX). The Nasdaq and Russell 2000 are still lagging their 200-day moving averages, but I have been mentioning that we would get to this point. The “bad news” is that both tech and the small-caps are still under their 100-day moving averages.
While this is still a temporary bearish development, the Nasdaq and Russell 2000 are only about 1% away from triggering their 100-day moving averages. The 200-day moving averages for both are a different story, as tech is nearly 3% away, while the small-caps are 6% away from tapping this level.
My timing since the February low has been spot on, but picking market tops and bottoms is never an easy task. The blue downtrend line in the chart below was at 1,885-1,900, and I talked about how the major moving averages would likely come into play in the coming weeks. Here is a look at the S&P’s 500 chart from the Feb. 16 Pre-Market Update:
I’m hoping to pick a top to the current rally, but circumstances can change for the better or worse. Having said that, I have repeatedly called for a run towards the major moving averages that should last through mid-March, and Friday’s action verified my stance once again.
What I would like to see first to start this week is a higher Monday close on the Dow. This would confirm the follow-through from Friday’s positive finish. Last week, I talked about the importance of Monday/Friday closes and how they can signal that money is either flowing in or out of the market.
Back-to-back Monday/Friday wins to start the week and another possible higher finish this Friday could confirm a continued rally into next week. This event will take all week to play out, but it would be a continued bullish development.
The other major tell this week could be the VIX. I also mentioned in mid-February that a rally towards the major moving averages would bring volatility towards 15. I would like to see a slow downdraft towards this level instead of a sudden take-out, as it would confirm that a move below this level could come.
However, the way the action plays out in the VIX could determine how much gas is left in the bulls’ tank. A sudden spike to 17.50 and a move back towards 20 would likely be a good sign that a peak has been reached.
I want to spend a little time this week talking about commodities. Gold always grabs the headlines, but other metals have seen resurgence as well.
Gold ($GOLD, $1,251, down $22) came into the year near the $1,060 level and pushed a high of $1,287 on Friday. At current levels, the yellow metal is up 20% year to date, and the chart remains bullish despite what appears to be short-term resistance at $1,280.
The 50-day moving average made a strong crossover above the 200-day moving average in late February to confirm that continued higher highs were in store. The 50-day moving average remains in a strong uptrend, and the 100- and 200-day moving averages are starting to curl higher following a downtrend that lasted throughout 2015.
The 3-year weekly chart shows that the next layers of resistance are at $1,300-$1,350 and the 200-week major moving average. It looks like a given that these levels will be cleared, with stretch to $1,400-$1,500 an ounce at some point in 2016. The 50-week moving average has also started to show an upturn following a multi-year decline. This is a very bullish setup for the longer term.
Despite the continued run to fresh highs for gold, the SPDR Gold Trust ETF (GLD, $119.41, down $2.09) fell nearly 2% on Friday. The technical setup is still bullish, with the 50-day moving average crossing above the 200-day moving average at the end of February.
I profiled the GLD March 116 calls (GLD160318C00116000, $4.10, down $1.35) in the Feb. 16 Pre-Market Update as well. These options were trading for $1.50 at the open the prior Monday, and they are still showing a gain nice gain despite the nearly 25% pullback. However, time premium is starting to erode, as the options expire this Friday.
The GLD April 125 calls (GLD160415C00125000, $1.27, down $0.76) fell 37% on Friday and look attractive at current levels. Although this isn’t an official trade, it could become one if GLD shares clear $122.50 and the March 4 high of $122.37, so put these options on your watch list.
As far as a bearish trade, I’m watching $114 following the “gap up” to this level in early February. It may take a few weeks or months for this level to trigger, but, if and when it does, I will likely go short. I’m watching the GLD May 110 puts (GLD160520P00110000, $0.80, up $0.15) as well to play a short-term top or pullback, but, again, we’ll wait for $114 to crack.
Silver ($SILVER, $15.51, down $0.11) is also in a bullish breakout, but it is stalling at overhead resistance at $16. I’m waiting for silver to clear $16.25 to possibly play a bullish call option in the sector, so stay tuned.
One of the slick-talking pros said that there was no trend in the market and that trading would remain difficult for weeks and months to come. This statement was totally false, as there have been two vicious trends already this year. The January selloff was nasty, and the rebound off of the February lows has also seen double-digit percentage moves in the major indices. The key, of course, is catching these major market moves and not being afraid to go long or short. I disagree that there is no trend, but we can all agree that there will be volatility.
With fourth-quarter earnings season winding down, the rest of March will be light on the news front. Aside from the Federal Open Market Committee (FOMC) meeting announcement this Wednesday, the economic calendar will be a ghost town, so the market will likely react to political and possibly geopolitical risk.
I usually talk more about the zombies in D.C., but they are starting to walk. The walking dead and corporate America are both going to make this a long and hot Spring. Hopefully, cooler heads will prevail, but we will need to stay focused to take advantage of the incredible market moves that are yet to come in 2016.
Momentum Options Play List
Closed Momentum Options Trades for 2016: 28-4 (88%). 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.
American Express (AXP, $59.46, up $0.71)
AXP April 62.50 calls (AXP160415C00062500, $0.63, up $0.10)
Entry Price: $0.60 (3/11/2016)
Exit Target: $1.20
Stop Target: None
Action: Shares are trying to build a floor of support at $58.50-$58 and the 50-day moving average. Near-term resistance is at $60, and a close above this level could possibly lead to $62.50-$65 and the 100-day moving average.
Mylan (MYL, $48.60, up $1.31)
MYL April 45 puts (MYL160415P00045000, $0.77, down $0.44)
Entry Price: $1.10 (3/10/2016)
Exit Target: $2.20
Stop Target: None
Action: Resistance is at $49-$49.25. The 50-day moving average closed below the 100-day moving average on Friday to confirm a “mini” death cross. This is usually a bearish development. Support is at $47-$46.50, but there is risk to $45-$44 on a close back below the latter.
You can read my original write-up in the March 11 Pre-Market Update.
Rambus (RMBS, $13.25, up $0.12)
RMBS April 13 calls (RMBS160415C00013000, $0.57, down $0.02)
Entry Price: $0.40 (3/7/2016)
Exit Target: $0.80
Stop Target: $0.50 (Stop Limit)
Action: Resistance is at $13.50-$13.75 over the near term. A move above the latter could lead towards $14-$16. Support is at $13-$12.75.
Intel (INTC, $31.76, up $0.51)
INTC April 29 puts (INTC160415P00029000, $0.25, down $0.08)
Entry Price: $0.38 (3/7/2016)
Exit Target: $0.80
Stop Target: None
Action: Short-term resistance is at $32 and the 100-day moving average. Support is at $31.50, followed by $31-$30.75 and the 200-day moving average
You can view a chart for INTC and read my write-up in the March 7 New Trade Alert.
Editor and Chief Options Strategist