In This Issue:
Dear Momentum Options Subscriber,
The bulls ended March with their biggest win since last October, as the market rallied throughout the month following its stay in a tight trading range. Friday’s no-joke unemployment numbers were a relief to Wall Street, and the start of April showed additional follow-through.
The Dow jumped 107 points, or 0.6%, to finish at 17,792 on Friday. The blue-chips were slammed on the open and fell 127 points to 17,568. Fresh support at 17,600 was slightly stretched, but it held for the fourth-straight session. The temporary push past resistance at 17,800 still shows that a possible run towards 18,000 could be coming.
The S&P 500 vaulted 13 points, or 0.6%, to end at 2,072. The index tested lower support at 2,050-2,040 following the kiss to 2,043 at the start of trading. The surge to 2,075 tested lower resistance at 2,075-2,080, and a move above the latter will likely lead to 2,100.
The Nasdaq surged 44 points, or 0.9%, to close at 4,914. Tech tumbled to a low of 4,832, with support at 4,850-4,825 sticking on the opening scrum. The nearly 2% rebound off of the lows and the move above 4,900 were very bullish developments. This keeps fluff up to 4,950-5,000 in play. However, any backtest to 4,900-4,875 and the 200-day moving average needs to be watched carefully.
The Russell 2000 climbed 3 points, or 0.3%, to settle at 1,117. The small-caps were choppy throughout the first half of the action, with the bears pushing a low of 1,102. Crucial support at 1,100-1,075 and the 100-day moving average stuck like Chuck for the fourth-straight session. Resistance is at 1,120-1,125, and a move above the latter will likely lead to a test to 1,140 and the 200-day moving average.
The S&P 500 Volatility Index ($VIX, 13.10, down $0.85) reached a peak of 15.28, with the bulls holding resistance at 14-15. A close back above the latter might represent a short-term top. I have been predicting that major support at 13.50-12.50 would likely trigger over the near-term, and I’m still looking for a close below the latter. It is too early to say that the VIX will tap 11-10 on a move below 12.50, but it is possible. A “death cross” is also in the midst of forming, which is when the 50-day moving average closes below the 200-day moving average. This would be another possible bullish signal for the market, despite the bearish setup.
As I mentioned above, the March monthly market gains were the largest since last October. The Dow added 1,168 points, or slightly more than 7%, and the S&P 500 advanced 127 points, or nearly 7%, which brought both indices into positive territory for the year. The Nasdaq and Russell 2000 held their own after adding nearly 312 and 80 points, or 7% and 8%, respectively.
I have mentioned in recent weeks that a run towards the 200-day moving averages was in the mix. This is still the case, but getting back to green for 2016 in tech and the small-caps is going to take a continued monumental rally off of the mid-February lows.
The main clue I said to watch for last week was the price action in the financial and transportation stocks. Let’s start with these two sectors first.
Financials pulled back on the mid-week Fed speak, and I have mentioned previously that they have underperformed the overall market for the past few years. Janet gave the market a bullish blessing with her dovish comments on interest rates last week. In my opinion, her comments can be summed up in the following sentence: No more rate hikes for the rest of the year.
The financial stocks showed gains last Wednesday, and this was the first sign that higher highs might come into play over the rest of the week. The hold at support on Thursday and the follow-through on Friday in the sector was good to see. Continued strength will depend on the proof in the earnings pudding when financial companies start reporting in a few weeks.
The Financial Select Sector SPDR (XLF, $22.70, up $0.20) reclaimed its 100-day moving average on Friday, and the 50-day moving average is curling higher. The next layers of resistance are at $23 and the 200-day moving average. Support is at $22.50, with risk to $22 on a close back below this level.
The Dow Jones Transportation Average ($TRAN, 7,887, down 56) failed to clear and hold the 8,000 level to start last week. The backtest to 7,800 and the 200-day moving average held, and there is risk to 7,600 and the 100-day moving average if those levels are breached. The 50-day moving average is in a rising uptrend, and a rebound past 8,000 to start this week would be a very bullish development.
Other sectors that have shown strength recently include healthcare-providers and biotech. Here were my thoughts on healthcare-providers from early February:
“The IHF exchanged-traded fund has been in a mini trading range since bottoming at $110.32 in January. Short-term support is at $112.50 but a move below $110 could get the late August of $95 and change in play. Resistance is at $117.50 followed by $120-$121 and a downward sloping 50-day moving average.
While there is a good chance a rebound rally could lead to $120+, I will be watching for a break below $112-$110 to possibly go short the index. However, options are thinly traded on IHF with wide bid/ask spreads. This will likely deter me from trying to trade options but it will help determine momentum in the sector.”
As you can see from the current chart below, the healthcare-providers, as represented by the iShares Dow Jones U.S. Healthcare Providers ETF (IHF, $122.97, up $0.99) broke down like a rented mule in early February following the breach of $110. The bears pushed a low just south of $106 shortly afterwards, and the “V-shaped” recovery since then has been textbook.
As far as biotech, the sector has been hammered by negative news and price manipulation this year. The Biotech iShares ETF (IBB, $268.31, up $7.50) stayed in a steady downtrend to start 2016 following its 52-week high just north of $400.
A trading range has formed since early February near the $240 level, with a top at the $270 level now in play. Friday’s second-straight close above the 50-day moving average appears to be a bullish signal, providing $275-$280 clears. A failure or struggle to clear $270 this week would keep me cautious on biotech.
I have mentioned that trading options on the IHF can be difficult due to the low volume and wide bid/ask spreads. Trading biotech and the IBB are a little more doable, but the premiums are very pricey.
For instance, the IBB April 270 calls (IBB160415C00270000, $5.50, up $2.30) jumped over 70% on Friday on decent volume. These calls options opened at $2.77 and reached a peak of $5.80. There could be further upside in these call options if IBB continues to show strength, but the aforementioned call options expire in 11 days, or next Friday.
It is very possible that a 100% return could still be achieved from current levels, but it would be a very high risk/high reward trade. A quick look at the math reveals that if IBB shares clear $280 by the April 15 close, the IBB April 270 calls would be $10 “in the money.” At $281, the options would be worth $11 for a triple-digit gain from an entry price of $5.50.
More realistically, Limit Orders at $5.75-$6 could be used on this morning’s open by aggressive traders and on a move above $270 in IBB. While this is not an official recommendation for the Momentum Options portfolio, I would set an Exit Target at $8-9 to target a quick profit of 33%-50%. I rarely trade options over $5, so I will be sitting on the sidelines. However, I do have several biotech stocks on my watch list that we can use to trade bullish and bearish options with prices lower than $1.25.
The technical outlook is also forecasting a possible rosy market in April. The 50-day moving averages for the major indices are all curling higher across the board. The bulls have cleared the 100- and 200-day moving averages, which are already flattening out and showing signs of drifting lower. The lone exception is the small-cap index, as it still has another 3% move to go to clear its 200-day moving average.
This type of price action suggests that the 50-day moving averages are on track to clear the 200-day moving averages, forming “golden crosses” over the next month or two. However, the two are still miles apart, and we will need to watch how they react during earnings season.
The higher-high stair-stepping off of the mid-February lows is also forecasting a possible breakout towards prior all-time highs. The time period for a continued rally looks extremely good through April and possibly into May. However, at some point during the summer, if not sooner, we will have to watch out for a possible “elevator drop.”
For those of you that have followed me over the years, I often say that the bulls take the stairs to higher highs, while the bears like to take the elevator down. The aforementioned charts for the indices also show the massive selloff, or elevator drop, to the January lows.
The selloff at the start of 2016 shocked Wall Street, but we were well prepared for it. I worked very long hours over the holidays and haven’t stopped since, as the volatility has been incredible this year — both to the downside and recently to the upside. I was able to take a little break over the Easter weekend while keeping the portfolio rolling along, but I expect this type of price action to continue throughout 2016.
There could be another mini trading range developing into first-quarter earnings season if the start of the week is not strong. The bulls got off to a good start for April, which is historically the Dow’s best month of the year, as it has gained an average of 1.9% during the month since 1950. I’m looking for the small-caps and tech to lead the way higher this week and for the rest of April, as they have lagged the other major indices. However, if they show weakness or start to top, it could be a bearish signal and a reason for us to stay slightly cautious.
Momentum Options Play List
Closed Momentum Options Trades for 2016: 36-6 (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.
Inovio Pharmaceuticals (INO, $9.25, up $0.54)
INO May 10 calls (INO160520C00010000, $0.60, up $0.30)
Entry Price: $0.40 (4/1/2016)
Exit Target: $1.00-$2.00
Stop Target: None
Action: Shares pushed a high of $9.35 into Friday’s close and gained 6% for the session. The 50-day major moving average is trending higher and recently crossed above the 100-day moving average. This formed a mini golden cross, and a close above the 200-day moving average would make it an official golden cross. This is usually a very bullish setup for higher highs.
INO is a stock I actively follow and first brought to your attention in late January. Here were some of my thoughts along with a bearish chart that has now turned bullish:
“The company has nine clinical drugs in development, mostly in Phase 1, and it’s why the stock carries significant risk. However, with no vaccines or treatments for the Zika virus, shares have been on the move as the public becomes more aware of the threat.
The mosquito-borne disease has started to spread from Brazil and is now recognized in more than 20 countries. The Zika virus has been linked to a astonishing rise in pregnant women who give birth to babies born with unusually small heads.
Inovio Pharmaceuticals is working on a vaccine for the Zika virus that could be ready for emergency use later this year. The company’s lead developer said they were well ahead of the field in the race for a vaccine and timing is everything.”
I noticed that momentum was starting to pick back up in the stock, and the recent bullish call-option buying was the main reason I wanted to get us into this trade. The 52-week high is at $10.83, and a move past double-digits over the near term will likely generate a triple-digit profit. The three-year weekly chart shows that a run to the mid- to upper-teens could come:
If shares of INO are above $11, technically, by mid-May, these call options will be worth at least $1, which would represent a 150% from the entry price. If the stock trips $12, these options will be worth at least $2, which would represent a massive 500% return from the entry price.
If you missed getting in this trade on Friday, there is good news. My Exit Targets are at $1-$2 based on the aforementioned levels on where the stock might be by mid-May. At current levels, this means there is another $0.40-$1.40 in premium left to attain. At current levels, my Exit Targets would represent gains of 67%-133% if reached.
With the technical picture looking good, I turned my attention to the company’s financials, although I already knew they were operating at a loss. With small biotech companies, this can often be the case, which is why you have to investigate what drugs are in the pipeline along with the potential revenue.
As far as the numbers, the company recently reported a loss of $0.25 a share versus estimates for a loss of $0.20. Revenue of $5.9 million also came in shy of expectations for nearly $7 million. Much of the revenue was generated through development payments from a grant along with up-front payments from a partnership agreement with MedImmune.
While this isn’t the best business model right now, the company has over a half-dozen development drugs in their pipeline, and one (or more) could possibly be a billion-dollar drug. Inovio has revenues and partnership agreements that should keep them liquid until one comes to market or receives FDA approval.
Due to possible continuing volatility, I love this trade as long as $8 holds on any major pullbacks.
Hertz Global Holdings (HTZ, $10.20, down $0.33)
HTZ May 11 calls (HTZ160520C00011000, $0.63, down $0.12)
Entry Price: $0.60 (4/1/2016)
Exit Target: $1.20
Stop Target: None
Action: Shares are trying to build a new base of support at $10. There is risk to $9.50 and the leveling 50-day moving average on a close below this level. I like this trade as long as $9.50 holds, but I will likely exit half or all of the position if that level is breached. Otherwise, resistance is at $10.50-$11. A move above the latter will likely get $11.50-$12 and the 100-day moving average in play.
In late February, the company beat earnings by a penny, coming in at $0.05 versus expectations for $0.04. Revenue was slightly light at $2.41 billion versus the forecast for $2.52. At the time, Hertz warned of continued soft pricing in the U.S. rental-car market as well as continued weakness in upstream oil and gas markets that could weigh on equipment rental.
The car-sales numbers on Friday from Ford (F) and General Motors (GM) were also disappointing, which seemed to weigh on HTZ.
If shares of HTZ are above $12.20, technically, by mid-May, these call options will be worth at least $1.20, which would represent a 100% return from the entry price.
Oracle (ORCL, $41.16, up $0.25)
ORCL May 42 calls (ORCL160520C00042000, $0.57, down $0.02)
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 its good earnings report.
The 50-day moving average has been rising higher since the beginning of March and is also in the process of forming golden crosses with the 100- and 200-day moving averages.
Editor and Chief Options Strategist