Dear Momentum Options Subscriber,
Fed Chair Janet Yellen used just the right words to please both Wall Street and Main Street, as the broad market closed at its highest level of the year on Tuesday. The trading range that lasted for about a week felt like an eternity to some traders, especially in today’s fast-paced world. However, this morning’s headline sums up exactly what we have been doing while we build out our next batch of winning trades.
The Dow jumped 97 points, or 0.6%, to end at 17,633. The blue-chips traded down to 17,434 shortly after the open and stayed in negative territory until Yellen’s statements. Support at 17,400-17,350 held before the surge into positive territory. The bullish momentum got stronger into the close, which was a good signal. The move into the resistance zone at 17,600-17,650 also keeps 17,800-18,000 in play.
The S&P 500 soared nearly 18 points, or 0.9%, to close at 2,055. The index followed the Dow’s lead and tested a low of 2,028 on the open. Support at 2,025-2,020 held for the eighth-straight session, which has been one of the main reasons I have stayed bullish over this timeframe. The close above 2,050, which was just a point off of the intraday high, gets 2,060-2,065 in the mix. There is additional fluff to 2,075-2,100 on a move above the latter.
The Nasdaq zoomed roughly 80 points, or 1.7%, to settle at 4,846. Tech was a little weak following the trip to 4,749 to start Tuesday’s session, but it held prior near-term support at 4,750. The index is still down 161 points year to date, and it would need to rally another 3% to regain the 5,000 level. Resistance is at 4,875-4,900, and a move above the latter could confirm that the index will see positive territory in April.
The Russell 2000 zoomed nearly 28 points, or 2.7%, to finish at 1,109. The small-caps also gave a good signal that the mixed action would turn bullish, as they followed tech’s lead. The bulls held prior support at 1,075 on a dime before the recovery that allowed the index to close near its session high. The breakout past the 1,100 level created a new ballgame, as the Russell continues to be the most volatile of the major indices.
The S&P 500 Volatility Index ($VIX, 13.82, down 1.42) stayed elevated throughout the first half of the action, with the bears pushing a peak of 15.89. Resistance at 16.50-17.50 easily held before the breakdown back below 15. The bulls kissed 13.79 but ran out of time to challenge the 13.50-12.50 levels. Perhaps they will come into play later this week or next. Another close back above 15 would likely get us back into a trading range with more downside market risk than upside potential.
I have another detailed write-up on our latest trade in Oracle (ORCL) listed below, so let’s go check it out.
From desk to press, futures look like this: Dow (+104); S&P 500 (+12); Nasdaq 100 (+34); Russell (+7).
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.
Oracle (ORCL, $40.70, up $0.08)
ORCL May 42 calls (ORCL160520C00042000, $0.51, down $0.01)
Entry Price: $0.55 (3/29/2016)
Exit Target: $1.10
Stop Target: None
Action: Resistance is at $41-$41.25. Support is at $40. Shares are on track to test their 52-week high north of $45, and I love this trade as long as $39.50 holds on any pullback. This level represents the breakout point that followed a good earnings report.
The company recently topped Wall Street’s expectations by reporting earnings of $0.64 a share versus estimates for $0.62 a share. However, revenues were a tad light at $9 billion compared to the forecast of $9.12 billion. This is either a short-term problem or a longer-term concern based on some of Oracle’s businesses.
The company’s licensing deals were lighter than expected, while cloud revenues blew past expectations. How this imbalance improves or widens will determine revenue growth in upcoming quarters.
Following the breakout on earnings, several analysts came out with bullish comments on the stock, while others shrugged off the results. I don’t get involved in the ratings game, but I do look at their price targets. For instance, one brokerage firm kept its “Buy” rating on the stock with a $50 price target. This would represent roughly a 25% return on the stock from current levels, if met.
Of course, I’m more interested in the possible option returns than I am in the stock’s potential. I have mentioned that my near-term price target for ORCL is $45, and this trade will be profitable if shares trade above $43.10, technically, by mid-May. If shares get there faster and start pushing $44-$45 before this time period, our option profits will be well into the triple-digits.
Rambus (RMBS, $13.87, up $0.39)
RMBS May 14 calls (RMBS160520C00014000, $0.62, up $0.18)
Entry Price: $0.45 (3/28/2016)
Exit Target: $1.10, lower to $0.90
Stop Target: None
Action: Lower the Exit Target from $1.10 to $0.90.
I still think these options can trade past $1.00-$1.10, but I wanted to keep my Exit Target parameters consistent at 100%, which is why I have adjusted it to $0.90. All of my trades target a 100% return and, at times, option trades can return more than this.
I usually try to start locking in profits once a triple-digit return is achieved, so I wanted to clarify any confusion on the lowered Exit Target. If the Exit Target at $0.90 is met, I may decide to raise it from there. I could also take half-profits, but shares are showing strong momentum following yesterday’s high of $13.99.
Near-term resistance is at $13.75-$14. Support has moved up $13.75-$13.50. I mentioned that if shares cleared $14, I could “piggy-back” this trade with additional call options. If this level is cleared today, I could send out a New Trade alert.
You can read my full write-up on RMBS in the March 29 Pre-Market Update.
Nucor (NUE, $47.24, up $0.76)
NUE April 48 calls (NUE160415C00048000, $0.62, up $0.18)
Entry Price: $0.55 (3/17/2016)
Exit Target: $0.80 (Limit Order on first half)
Stop Target: $0.57 (Stop Limit)
Action: Set a Stop Limit at $0.57.
After being down nearly 50% in this trade, the last thing I want to do is give back a profit. This is why I set a Stop Limit at $0.57 today. With these being April options, I mentioned that I wanted to be out of the trade by this Friday. However, I’m still hoping we can make at least 50% or more with this trade as long as fresh support holds.
Resistance at $47-$47.25 is being challenged, and yesterday’s 40% pop in the options is just what we needed. I have been mentioning that a move above the latter should get multi-month highs in play. The 52-week peak is at $50.70, and support has moved up to $47-$46.50.
You can read my extended write-up on NUE in the March 28 Pre-Market Update.
Q: You have probably answered this before, but can you please explain why you use Stop Limit orders instead of regular stops? — M.G.
A: I use Stop Limit orders when a trade looks like it may be going against us because it takes the emotion out of the situation. It also helps in identifying when a trade is possibly not going to work out. It is also important to note that Stop Limit orders can become market orders if they aren’t filled, which is why I monitor all of my trades throughout every session Wall Street is open.
Q: I’ve noticed from your updates that the Russell 2000 moves much more than the S&P, etc. Why is that? — K.R.
A: That’s a great observation, and it’s something I mentioned in my commentary this morning. It was really rewarding to see you pick up on this clue, as there are times when I love teaching the market more than trading it.
To the point, I believe the main reasons the small-caps have become more volatile are the dollar and the talk about interest rates.
The suits-and-ties like to say that the small-caps usually underperform in a rising-rate environment and, in theory, they are correct. While rates were discounted and near zero over the past seven years, the small-caps performed well. Following the interest-rate hike in December, the small-caps have struggled and have underperformed the other major indices.
The odds of another rate hike this year have been decreasing over the past few weeks and months. The time to take action is also dwindling, as the Fed will want to look “neutral” once the presidential candidates from both parties have been established.
Q: For the trades that you recommend, what has a greater impact on the option’s price — the strike or the expiration date? — A.T.
A: I would say the strike price has more impact than the expiration date, as the ultimate goal is to have the stock above or below the strike, depending on whether it’s a call or put option, by the expiration date. In other words, the strike price is an already-set price, or the judgement bar, that determines where the trade will be profitable or not. The expiration date is simply the amount of time we have to be right or wrong about the trade.
Editor and Chief Options Strategist