In This Issue:
Dear Momentum Options Subscriber,
The bulls rebounded to get the overall win last Thursday following a final-hour push into positive territory. The bears still got the weekly win, which snapped a five-week slide, and they appear to have a little more momentum, as the S&P 500 closed lower. Volatility spiked to its highest level in nearly two weeks, but it still stayed below key resistance levels.
I’ve talked about weakness in the market towards the end of March, and we could see more of the same this week with a slightly wider trading range. If key support levels hold, April could see higher highs and a return to positive territory. The Dow is holding onto a slight gain for the year, but the other major indices are still in the red.
The Dow added 13 points, or 0.1%, to settle at 17,515 on Thursday. The blue-chips tested near-term support at 17,400-17,350 throughout the first half of the action. The bears pushed a low of 17,399, with backup help at 17,200-17,000 and the 100- and 200-day moving averages waiting in the wings. Resistance remains at 17,600-17,650, and a move above the latter would likely lead to 17,800-18,000.
The S&P 500 slipped nearly a point, or 0.04%, to finish at 2,035. The index tested a low of 2,022 within the opening minutes, but support at 2,025-2,020 and the 200-day moving average held. There is backup help at 2,000-1,995 and the 100-day moving average. Resistance is at 2,050-2,060 on a move back above 2,040. The 50-day moving average has been in a slight uptrend, but it appears to be leveling out.
The Nasdaq gained 4 points, or 0.1%, to end at 4,773. Tech tumbled to a low of 4,734 on the open, with support at 4,725-4,700 holding strong. A close below 4,700 over the near term would be a bearish development, with risk to 4,600-4,575 and the flattening 50-day moving average. Resistance at 4,800 and the 100-day moving average remains like a brick wall. However, continued closes above this level would get 4,850-4,900 and the 200-day moving average in the mix.
The Russell 2000 climbed nearly 4 points, or 0.4%, to close at 1,079. The small-caps traded down to the lower end of my wiggle-room target area of 1,070-1,065 before rebounding. There is risk 1,040-1,035 and the 50-day moving average if the bears crack 1,060. The bulls need to clear 1,090-1,100 and the 100-day moving average this week to regain their momentum. The 200-day moving average remains in a steady decline and will likely keep any upside rallies contained over the near term.
The S&P 500 Volatility Index ($VIX, 14.74, down 0.20) closed near its session low of 14.71 after spiking to a high of 16.44. It was the second-straight session in which the bears have cleared 15, but this level has held into the close for seven-straight trading days. This is a bullish signal, and I continue to mention that we do not need to get aggressively “short” until 17.50-20 cracks. However, we still need to be somewhat cautious on a continued rally until the bulls can clear and hold the 13.50-12.50 levels.
Last week’s losses were limited to less than 1% for the most part, as the Dow fell 87 points, the S&P 500 gave back 14 points and the Nasdaq dropped 22 points. The biggest concern was the Russell 2000, as the index fell 2% last week.
The bulls have a substantial lead for March with four trading days left in the month. The Dow is up a whopping 999 points, or over 6%, and the S&P 500 has surged 103 points, or 5.4%. The Nasdaq has jumped 215 points, or 4.7%, while the Russell 2000 has rocketed 45 points, or 4.4%.
The bears would have to do some serious damage to erase these stellar gains, and a win would give the bulls their first monthly sweep in three months. The Dow closed slightly higher in February to snap a two-month slide, but the other three major indices haven’t closed higher for the month since November of 2015.
I have kept a spreadsheet of monthly closes for over three years. The current losing streaks in the S&P 500, Nasdaq and Russell 2000 have been the longest over that time frame, so a break of this trend would be a slightly bullish development. However, the technical picture is a little mixed.
The fact that the Nasdaq and Russell 2000 are still struggling with their 100-day moving averages is a concern. They were breached last week and are still in play, but these are levels that need to be cleared and held this week. Even more concerning are the 200-day moving averages. While the Nasdaq is just 2% away from clearing its 200-day moving average, the small-caps are nearly 6% away.
The Dow and S&P 500 are holding their 200-day moving averages and are benefitting from the “safer money” that is moving into and staying in the market. Investors are looking for safety in some of the blue-chips and other stocks that pay steady dividends.
One tech stock that has performed well during the recent choppiness is Facebook (FB, $113.05, up $0.51). Shares are within spitting distance of the 52-week and all-time high of $117.59 that was made in early February.
While there is risk to $110 over the near term, all of the major moving averages are in a strong uptrend. The 50-day moving average has crossed above the 100-day moving average, forming a “mini” golden cross. Near-term resistance is at $115, and I’m looking at call options to play a move above $114.75-$115.
Option premiums are pricey on Facebook due to the volatility and the fact that shares trade for over $100. I usually like to trade options under $1.25, but I do see the potential for “in-the-money” call options on FB to make a decent return if shares maintain their momentum.
There are both weekly and monthly options available to trade on Facebook, but I’m targeting the April monthly call options this week. I would like to get them cheaper on a backtest to $110, but I will likely pull the trigger if $114.75-$115 clears.
The FB April 113 calls (FB160415C00113000, $2.55, up $0.15) traded over 1,300 contracts last Thursday. The options tested a low of $2 on the stock’s test to $111.68, which is where I would start looking to buy them. These options expire in less than three weeks, but the math looks good for a possible double from current levels.
If FB shares can clear $117-$118 and set a fresh 52-week peak by April 15, technically, the aforementioned call options would be worth $4-$5 for a potential double.
The options will also expire before the company reports earnings the week of April 25. This takes the headline risk away from this trade, but I wouldn’t be too worried about Facebook’s numbers.
The company has smashed Wall Street’s expectations over the past four quarters by $0.11, $0.05, $0.03 and $0.02, respectively. Current-quarter estimates have Facebook earning $0.62 a share on revenue of $5.25 billion.
If shares of FB clear $115, the April 113 calls will probably be above $3. If shares show strength on Monday, they are probably a buy up to $3 with an exit target of $4-$5. If shares open lower and the options dip near $2, I may send out a Trade Alert, but wait for my signal.
I also like the FB April 115 calls (FB160415C00115000, $1.60, up $0.10), which are slightly “out of the money,” on continued strength. A speculative buy and Limit Order up to $2 could be used on these options if shares clear $113.50-$114 this week. A close below $110 for FB stock would be a bearish development and a good place to set a stop loss on both aforementioned call options.
The Monday/Friday closes continue to be bullish, as the Dow has closed higher over the past three Mondays and on four of the past five. Although the market was closed this past Friday, the bulls have won three-straight. This week’s Monday/Friday closes will be important to watch to see if money is still “flowing” into the market.
Two sectors I will be watching closely this week are the transports and the financial stocks. The Dow Jones Transportation Average ($TRAN, 7,926, down 30) is currently holding its 200-day moving average, but a close below 7,800 would be a bearish development. I mentioned that the Dow Jones would follow the transports on higher highs, and they did. However, the blue-chips will likely follow suit to lower lows if the transports fail to hold support. Resistance is at 8,100, and a move above 8,200 could lead to possible higher market highs.
The Financial Select Sector SPDR (XLF, $22.31, down $0.14) fell back below its 100-day moving average last week and has wiggle room to $22. A move below this level will likely lead to a test to $21.50-$21.25 and the 50-day moving average. The bulls need to recover the $22.75-$23 before I would go long the sector.
While our portfolio is light at the moment, we will be ending the quarter in fantastic shape. To say I’m extremely proud of my track record would be an understatement. More importantly, I work hard because I don’t want to let you down. After 40 trades, to be 34-6 in this kind of trading environment is a blessing.
Even better is that I also hope to top this track record over the next three months. I still expect wild price swings and volatility to play a major role going forward, but I have been telling my publisher and my longer-term subscribers since the end of last year that 2016 could be one of the best years ever to trade the market.
I could have New Trades today, depending on the action, so stay close to your email inboxes.
From desk to press, futures look like this: Dow (+36); S&P 500 (+5); Nasdaq 100 (+14); Russell (+3).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 34-6 (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.
Nucor (NUE, $46.48, up $0.43)
NUE April 48 calls (NUE160415C00048000, $0.40, up $0.10)
Entry Price: $0.55 (3/17/2016)
Exit Target: $1.10
Stop Target: None
Action: Resistance is at $46.50-$47. A move above the latter should get multi-month highs in play. The 52-week high is at $50.70. Support is at $46, with backup help at $45.50-$45.
The major moving averages are in a strong uptrend, with the 50-day moving average crossing above the 100-day moving average. A continued move above the 200-day moving average would create a golden cross, which is usually a bullish setup.
Steel prices have rebounded over the past several weeks, and the sector has been performing well following the recent “anti-dumping” laws that have been imposed. Earlier this month, the Department of Commerce imposed trade restrictions of more than 250% on imports of cold-rolled steel. Brazil, China, India, Japan, Korea, Russia and the United Kingdom were named in the affirmative preliminary determinations in the anti-dumping duty investigations of imports.
The move has benefited U.S. steel prices and producers, and some analysts believe that the rally could last through the end of the second quarter. Below is a chart for the Dow Jones U.S. Steel Index ($DJUSST). The recent push past $190 follows the February low of $127 and change.
Editor and Chief Options Strategist