Dear Momentum Options Subscriber,
It wasn’t pretty, but the bulls successfully registered their fourth-straight Monday win as the blue-chips closed higher. Tech slacked, but the other major indices tackled positive territory following a scrum that lasted for much of the session. The bears got a small victory of their own, as volatility closed above a key level of resistance.
The Dow gained 19 points, or 0.1%, to finish at 17,535. The blue-chips held green for the first hour of action before slipping into the red to a low of 17,493. Support at 17,400-17,350 easily held before the rebound to 17,583. Resistance at 17,600-17,650 remains a stickler.
The S&P 500 advanced a point, or 0.05%, to end at 2,037. The index stumbled to a low of 2,031 shortly after the open, but support at 2,025-2,020 was hardly threatened. The bounce to 2,042 afterwards looked bullish, but the index failed to hold the 2,040 level. Additional resistance is at 2,050-2,060.
The Nasdaq gave back a six-pack, or 0.1%, to close at 4,766. Tech was rocky throughout the session after reaching a peak of 4,787 on the open. Resistance at 4,800 held for the third-straight session. Near-term support is at 4,750, with backup help at 4,725-4,700. Monday’s bottom tapped 4,760.
The Russell 2000 climbed less than a point, or 0.06%, to settle at 1,080. The small-caps tested support at 1,075-1,070 following the intraday dip to 1,073. We are still riding shotgun with the bulls as long as 1,065 holds on any pullback. Continued closes above 1,080 this week are still needed to confirm a possible run towards 1,090-1,100. Yesterday’s close was the first step.
The S&P 500 Volatility Index ($VIX, 15.21, up 0.47) spiked to a high of 16.04 shortly after the start of trading despite the higher market open. The index stayed elevated throughout the day, and the close above 15 needs to be respected. The bulls have wiggle room to 17.50-20, which are levels where we could start getting aggressively short if they are breached.
Today could be busy, as Fed Chair Janet Yellen is scheduled to speak during Wall Street’s lunch break. Depending on her “tone,” the market could follow her lead. I could have New Trades for the portfolio either before or after the hoopla, so stay locked and loaded. I also have a detailed write-up for our position in Rambus (RMBS) this morning, so be sure to check that out.
From desk to press, futures look like this: Dow (-51); S&P 500 (-4); Nasdaq 100 (-7); Russell (-3).
Momentum Options Play List
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Rambus (RMBS, $13.48, down $0.03)
RMBS May 14 calls (RMBS160520C00014000, $0.47, up $0.02)
Entry Price: $0.45 (3/28/2016)
Exit Target: $1.10
Stop Target: None
Action: Near-term resistance is at $13.75-$14. A “golden cross” has officially formed on the chart, with the 50-day moving average crossing above the 200-day moving average. This is usually a bullish development for higher highs.
The next catalyst for a major move in the stock will arrive in a couple of weeks when Rambus announces earnings. The exact date is not yet available, but the numbers are scheduled to be released during the week of April 18.
The suits-and-ties are looking for a profit of $0.12 a share on revenue of $73.25 million. The company has topped or matched expectations in three of the past four quarters, with a penny miss sandwiched in between.
Despite the bullish chart, analysts are mixed on the stock, so some might not be doing their homework. One brokerage firm recently upgraded shares from “Buy” to “Neutral” while maintaining a $14 price target. Overall, there are two “Buy” ratings and one “Strong Buy.” There are now two “Hold” ratings on the stock as well.
While I’m pretty confident that Rambus will beat expectations, revenues need to come in north of $75 million for shares to regain some respect.
Rambus has a history of legal battles over its software and chips, but it has played friendly in recent years. The company now partners with companies instead of fighting with them, and its recent licensing deals are proof of the positive change.
The overhang of legal woes has been removed, and the company operates in a hot sector — security and smart sensors.
In late January, the company beat estimates by $0.03, but, more importantly, Rambus topped revenue estimates by $3 million. At the time, the company said that first-quarter revenue would come in at $71-$75 million, which is why I said earlier that it needed to top the latter.
Rambus also lifted its 2016 revenue numbers to $310-$325 million. Estimates were for $294 million, which is why analysts might be upgrading the stock on a beat-and-raise quarter. Of course, an earnings miss would be a deeper concern, so the upcoming quarterly results are crucial.
An earnings miss or lower-than-anticipated revenue could send shares tumbling towards $11-$10. This trade is based more on the technical outlook for the stock, but the fundamentals are improving, which is another reason why I like this trade a lot.
These options have 52 days before they expire, and I would like to see a rally into and after the earnings release.
Nucor (NUE, $46.86, up $0.38)
NUE April 48 calls (NUE160415C00048000, $0.45, up $0.05)
Entry Price: $0.55 (3/17/2016)
Exit Target: $1.10, lower to $0.80 (Limit Order on first half)
Stop Target: None
Action: Lower the Exit Target from $1.10 to $0.80, and set a Limit Order to close the first half of the trade at that level.
With these options expiring in less than three weeks, I would like to be out of half or all of this trade by this Friday. I still have high hopes for a breakout to higher highs, but time premium will start to decay rapidly over the next few weeks.
These call options are still “out of the money” by over $1, and the breakeven point, technically, is $48.55 by mid-April. This price target is very achievable from current levels, but, again, I’m more worried about time decay.
Monday’s high reached $47.19. Resistance is at $47-$47.25. A move above the latter should get multi-month highs in play. The 52-week peak is at $50.70. Support is at $46, with backup help at $45.50-$45.
You can read my extended write-up on NUE in the March 28 Pre-Market Update.
Editor and Chief Options Strategist