In This Issue:
Dear Momentum Options Subscriber,
The bulls continued their run to higher highs as they registered their fifth-straight week of gains. On the other hand, even with the broader market now in positive territory for the year, the talking heads continue to doubt the rally instead of embracing it.
The bears may have rolled over, but they are still holding tech and the small-caps hostage. Both indices are 3%-4% away from breaking even for the year, but they are currently pushing their respective 100-day moving averages.
The S&P 500 and the Dow have cleared their 200-day moving averages, which could carry the other two indices towards their 200-day moving averages on further momentum. However, late March has been known for historical weakness, and fresh support will need to hold on any market pullback.
The Dow jumped 120 points, or 0.7%, to settle at 17,602 on Friday. The blue-chips held positive territory throughout the session, with the high reaching 17,620. The close above 17,600 was a very bullish sign, and I have talked about a potential run to 17,800-18,000 if that level was cleared. Support is at 17,400-17,350 on a pullback, with additional help at 17,200-17,000 and the 100- and 200-day moving averages. Both moving averages have flattened out, and the 50-day is starting to trend higher, all of which are bullish signs.
The S&P 500 climbed 9 points, or 0.4%, to finish at 2,049. The index reached a peak of 2,052 shortly after the open and held 2,040 into the close. The move into upper resistance at 2,050-2,060 keeps hope alive for a run towards 2,075-2,080. Support at 2,025-2,020 has held for three-straight sessions, but a close below the latter would be a bearish development. There is wiggle room to 2,015-2,000 and the 100- and 200-day moving averages, which are also showing the same technical pattern as the Dow, including a rising 50-day moving average.
The Nasdaq gained 20 points, or 0.4%, to end a hair under 4,796. Tech opened higher but slipped two points to 4,772 shortly after the opening bell. Rising support at 4,775-4,750 held, and there is risk to 4,725-4,700 on a move below the latter. The push past 4,800 and run at the 100-day moving average fell shy of holding, but it looked good. Continued closes above these levels should lead to a run at 4,850-4,875 and the 200-day moving average. The 50-day moving average is also showing signs of leveling out following a severe downtrend that has lasted since the beginning of the year.
The Russell 2000 added 10 points, or 1%, to close at 1,101. The small-caps tangoed with 1,100 throughout the day and held this level, along with the 100-day moving average, into the close. I mentioned that there was possible fluff to 1,110-1,120 on continued closes above 1,100, but it remains to be seen if the index can reach 1,150 and the 200-day moving average. Fresh support is at 1,095-1,090, with risk to 1,080-1,075 on a close below the latter. The 50-day moving average is also starting to level out.
The S&P 500 Volatility Index ($VIX, 14.02, down 0.42) fell another 3% on Friday after trading to a low of 13.75. The bulls are within spitting distance of hitting 13.50-12.50, and these levels are still in play as long as 15 holds. I would be surprised, but happy, to see the VIX take out and hold 12.50, although this is where I’m expecting trouble. Short-term resistance is at 14.50-15, but we do not need to worry about the bears until 17.50-18 is cleared. The 50-day moving average is starting to curl lower, along with flattening 100- and 200-day moving averages, which is suggesting further weakness in the VIX.
The Dow is now up 177 points, or 1%, in 2016, while the S&P 500 has gained nearly a six-pack, or less than 1%. The Nasdaq is down 212 points, or 4%, and needs to clear 5,008 to show green for 2016. The Russell 2000 needs to recover 34 points, or 3%, to get back to even or clear 1,136 to show a slight gain for the year.
The returns from the mid-February lows have been incredible, and it’s easy to see why they are now being questioned. The Dow reached an intraday bottom of 15,503 and is now up nearly 2,100 points since then. The S&P 500 tapped 1,810 on Feb. 11 and has rebounded roughly 240 points. The Nasdaq kissed 4,209 and has surged 586 points, while the Russell 2000 bottomed at 943 and has gained 158 points.
The gains have left Wall Street jealous and begging to get back in. However, given the massive gains off of the mid-February lows, the suits-and-ties seem reluctant to put new money to work without a pullback or correction.
It sounds a lot like the current political race, in which doing the homework matters and conventional wisdom doesn’t. I’m not a big fan of politics, but the upcoming election will certainly affect Wall Street and the market. I also believe that Wall Street gets its unfair share of criticism, as the financial world would really collapse without it. In the end, things seem to work out, but expect volatility to pick back up during spring and summer.
The VIX traded to a high of 30.90 on the market’s February lows, but it was cut in half over the next five weeks. I don’t trade volatility that often, but, at some point, there will be a great trade there, which why I want you to add the iPath S&P 500 VIX Futures (VXX, 19.35, down 0.14) to your watch list.
The VXX has traded in a 52-week range of 31.48-15.48 and tested a high of 30.85 on Feb. 11. The current chart shows that a test to 18 appears likely, and a drop to 15 would represent a 50% haircut off of the high for the VXX, just like the VIX.
The 50-day moving average for the VXX is now in a slight downtrend, and the 100- and 200-day moving averages are flat lining. Continued closes below 18-17.50 could get the mid-teens in play on continued weakness. Resistance is at 20-21.
One of the easiest and most liquid ways to play volatility is by trading the VXX. While near-term options can be used to play a possible drop below 18, I’m also looking at longer-term options to play if the VXX moves back above 20-21.
Weekly and month call and put options can be used for bullish and bearish trades on the VXX, so let’s take a look at both.
The VXX April 20 puts (VXX160415P00020000, $1.80, up $0.20) were the most active on the regular monthly April option chain, as they traded nearly 4,300 contracts on Friday. These puts are “in the money” by nearly a point and could be used to play further weakness in the VXX. These options would double from current levels, or return 100%, if VXX trades below 16.40, technically, by mid-April.
I also like the VXX April 18 puts (VXX160415P00018000, $0.55, up $0.05) as a “cheaper” way to play the VXX. These options are more than a point “out of the money,” but they would double if VXX trades below 16.90 by mid-April. If the market stays strong on Monday and the VXX or VIX is showing weakness, both aforementioned put options might look like good short-term trades.
On the flip side, bearish traders could wait for the VXX to clear 21 while targeting longer-term call options. For instance, the VXX May 19 calls (VXX160520C00019000, $2.15, down $0.10) are slightly “in the money,” but they seem expensive at these levels with a falling VXX.
Meanwhile, the VXX May 25 calls (VXX160520C00025000, $0.90, down $0.10) traded an astounding 53,000 contracts on Friday versus previous open interest of under 16,000 contracts. These options are nearly 6 points “out of the money,” but they could be used as a short-term trade if VXX clears 19.75-20 at some point down the road.
The VXX June 25 calls (VXX160617C00025000, $1.35, down $0.05) were fairly active on Friday, as they traded nearly 1,400 contracts. Open interest is above 7,600 contracts. These options will become cheaper if the VXX continues to decline. I may start targeting them more seriously if and when they trade for under $1.
I have talked about gold and silver in recent weeks, but other commodities have shown tremendous strength. The rebound in aluminum, copper and steel have helped lift stocks like Alcoa (AA, $10.03, up $0.09), Freeport McMoRan (FCX, $10.76, down $0.14), and US Steel (X, $15.76, up $0.34) out of the doldrums.
All three aforementioned stocks have cleared their 200-day moving averages and are showing bullish charts, with upward-sloping 50-day moving averages. These stocks have either nearly doubled or more than doubled off of the February lows, so I’m a little hesitant to chase them. However, the price action is hard to ignore.
Of the group, Alcoa would be a good choice to play further strength because the overall use of aluminum is greater than steel or copper. Each metal is of its own importance, but Alcoa shares have lagged the gains of the other two stocks.
The regular AA April 10 calls (AA160415C00010000, $0.53, up $0.02) traded over 1,600 contracts on Friday, with open interest currently approaching nearly 80,000 contracts. These options expire in less than a month, but they could be used by bullish traders expecting a run towards $11-$12 by mid-April. The 52-week high is north of $14, which would represent another 40% move from current levels.
Of course, we don’t need shares of AA to make a run at fresh 52-week peaks in order to double our money in the aforementioned call options. These call options are slightly “in the money” and would double if shares of AA are north of $11, technically, by mid-April.
AA shares are on the verge of a multi-month breakout. A 10% move from current levels, or run to $11, would give us a 100% return in the options, as they would be $1 “in the money.” Near- term resistance is at $10.50, which if cleared should be the trigger to get $11 and possibly $12 in play. Rising support is at $10-$9.75, but a close below $9.50 and 200-day moving average would void the bullish setup.
This could be a busy week for the market, as Wall Street is closed in observance of Good Friday on March 25. This means the bulls and bears will be squeezing five days of action into four ahead of a three-day weekend. It is possible that the bulls can continue to climb the wall of worry, and the way next week plays out could hinge on Thursday’s action.
The good news is that if fresh support does hold, tech has closed higher ahead of Good Friday for 15-straight sessions. The possibility of six-straight weeks of gains would have the suits-and-ties envious, so they may start putting some money to work this week.
Next week could be a little tricky, as this is when we could see some late-March weakness. Fund managers will want to have strong stocks in their portfolio to show clients that they are participating in the run-up, especially with the broader market higher year-to-date. They will also want to dump any possible losers.
Following any weakness, I do expect higher highs into April ahead of tax-loss selling season. First-quarter earnings will also come into play the week after next, which is when the fun really begins.
In the meantime, I will continue to focus on the upside while keeping one eye on the backdoor. The technical picture has been clear all year, and we have benefitted tremendously from the wild price action. I said coming into 2016 that this could be one of the best years ever to trade the market if you do your homework. I continue to feel that way, which is why I want you on board for the long haul.
From desk to press, futures look like this: Dow (+7); S&P 500 (+0); Nasdaq 100 (+1); Russell (-0.5).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 30-5 (86%). 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.
Sony (SNE, $26.27, up $0.18)
SNE April 26 calls (SNE160415C00026000, $0.95, up $0.04)
Entry Price: $0.72 (3/17/2016)
Exit Target: $1.45
Stop Target: $0.75 (Stop Limit)
Action: Set a Stop Limit at $0.75.
Friday’s high reached $26.43. Short-term support is at $26-$25.75. Continued closes above $26 and the 200-day moving average would be bullish signals for a possible push towards $28. The 50-day moving average is starting to curl higher following a three-month downtrend. The next hurdles are at $26.50-$27.
Sony has become a virtual reality (VR) play, and it recently announced that its “PlayStation VR” will soon be coming to market at a $399 price point. This is a 33% cut from the company’s chief competitor, which is Facebook’s Oculus Rift. However, the Rift will be going on sale on March 28 for $600. Sony’s VR is scheduled to be released in October, but it will take preorders starting tomorrow.
American Express (AXP, $61.22, up $1.14)
AXP April 62.50 calls (AXP160415C00062500, $0.74, up $0.28)
Entry Price: $0.60 (3/11/2016)
Exit Target: $1.20
Stop Target: $0.63 (Stop Limit)
Action: Set a Stop Limit at $0.63.
Near-term resistance is at $62-$62.50. A move above the latter could lead to a push towards $64-$65 and the 100-day moving average. Fresh support is at $60.50-$60, followed by $58.50.
You can read my original write-up and view a chart in the March 14 Pre-Market Update.
Nucor (NUE, $46.70, up $0.05)
NUE April 48 calls (NUE160415C00048000, $0.61, down $0.04)
Entry Price: $0.55 (3/17/2016)
Exit Target: $1.10
Stop Target: None
Action: Friday’s high reached $47.36 before the backtest to $46.34. Resistance is at $47.50-$48. Support is at $46.25-$46. The 50- and 100-day moving averages are curling higher, and the 200-day moving average is flattening out. A close above $48 should lead towards the 52-week high north of $50.
Energous (WATT, $9.20, up $0.32)
WATT May 10 calls (WATT160520C00010000, $1.60, up $0.10)
Entry Price: $0.80 (3/15/2016)
Exit Target: $2.40
Stop Target: $1.20 (Stop Limit)
Action: Friday’s high tapped $9.30. Resistance is at $9-$9.50 on continued momentum. Support is at $8.50-$8.25.
You can read my detailed write-up in the March 17 Mid-Market Update.
Editor and Chief Options Strategist