In This Issue:
Dear Momentum Options Subscriber,
Last week was a rocky, choppy one for the market, which was to be expected ahead of the start of first-quarter earnings season. I mentioned last week that there could be a tight trading range with some downside weakness, but the good news is that the market’s backup support levels held.
Volatility also spiked to its highest levels since mid-March, but it settled down a little on Friday. The action could produce wider price swings in the coming weeks, especially with some of the financial stocks reporting over the next few days. The marquee names and more volatile stocks start announcing next week and into the rest of April. Needless to say, the market could easily move 5%-10%, higher or lower, by mid-May, so buckle up for what is going to be a fun ride.
The Dow gained 35 points, or 0.2%, to finish at 17,576 on Friday. The blue-chips soared to a high of 17,694 shortly after the open, with resistance at 17,700-17,800 acting like a brick wall. The slow fade afterwards reached negative territory ahead of the closing bell, with the bears pushing 17,528. Near-term support is at 17,400-17,350, and there is risk to 17,200 on a move below the latter.
The S&P 500 added 5 points, or 0.3%, to end at 2,047. The index also held positive territory for much of the session after testing upper resistance at 2,060. A move above this level would be very bullish for a possible run at 2,070-2,075. The pullback into the red was by less than a point, with support at 2,040 holding. There is risk to 2,025-2,015 on a move below 2,035.
The Nasdaq advanced 2 points, or 0.1%, to close at 4,850 and 5 points below its 200-day moving average. Tech reached a peak of 4,892 during the first half of the action, but it failed to clear resistance at 4,900. The second half of trading was spent mostly underwater, with the low checking in at 4,835. It is crucial that support at 4,825-4,800 holds on any pullback this week. A close below 4,775 and the 100-day moving average would likely lead to panic-selling.
The Russell 2000 climbed 4 points, or 0.4%, to settle at 1,097. The small-caps held positive territory throughout Friday’s session but struggled to hold resistance at 1,100. The high reached 1,106, but it was the third time in four sessions that the index has failed to hold 1,100. The good news is that support at 1,090 has been solid, but there is risk to 1,075-1,070 on a move below 1,085 and the 100-day moving average. The 50-day moving average is still in a strong uptrend.
The S&P 500 Volatility Index ($VIX, 15.36, down 0.80) stayed in the red while testing a low of 14.84. Although we didn’t get the close back below support at 15, upper resistance at 16.50-17.50 held throughout last week. More importantly, a “death cross” has formed on the VIX, with the 50-day moving average now below the 200-day moving average. This is signaling lower lows on the VIX, and I have been saying that there is a chance 13.50-12.50 could be taken out this month.
The historical late-March weakness the bulls avoided caught up with them during the first full week of April. The see-saw action whipsawed more traders out of the market and cast more doubts on the current rally. However, it is too early to draw that conclusion until we see how this week unfolds.
The action in the financial stocks was apparent, as they pulled back 3%, on average. The Financial Select Sector SPDR (XLF, $22.05, up $0.08) fell back below its 100-day moving average but held the $22 level. There is additional risk to $21.75-$21.50 and the 50-day moving average on continued weakness. A close below the latter would be a bearish development, which is why I will be watching this sector closely again this week.
JPMorgan Chase (JPM, $57.74, up $0.42) will announce its quarterly results before the start of Wednesday’s session. Wells Fargo (WFC, $47.07, up $0.14) will report ahead of Thursday’s open, and Citigroup (C, $40.47, up $0.20) will report ahead of Friday’s opening bell.
All three aforementioned stocks are struggling with their 50-day moving averages that have finally started to flatten out following a steady decline throughout the year. Each stock has its own interesting story, and they may be worth a look for a bullish earnings trade.
Let’s start with JPMorgan Chase and its CEO, Jamie Dimon, who purchased 500,000 shares of the stock on Feb. 11 between $53.13-$53.30 a share. Some of the talking heads have labeled this the “Dimon Bottom” following the incredible rebound off of the market lows since then.
However, technical analysis showed otherwise, and I predicted a rebound to the major moving averages in early February. Nonetheless, most of the suits-and-ties sat out of the market and were simply scared to trade.
As far as JPM, shares made a run towards $60 by late February and into mid-March, but they have since been in a downtrend. Near-term support lies at $56-$55, but shares could test $54-$52 on a lackluster quarter. Resistance is at $58, which is a level that needs to be cleared to start the week. The next waves of resistance are at $60-$60.50 and the 100-day moving average.
With Jamie putting his money where his mouth is, I’m guessing that the company will have a good quarter.
Analysts have the company earning $1.26 a share on revenue of $23.4 billion. During the past four quarters, JPM has topped estimates by $0.07, $0.31, $0.10 and $0.05, respectively. Revenue has come in higher in three of the past four quarters.
In January, JPM reported that it had a tangible book value of $48.13 a share, up 8% from the previous quarter. Mr. Dimon was also quick to add that the firm is getting “stronger and safer” each year. With this kind of talk, we should expect a beat-and-raise quarter. An earnings miss would be a disaster — to say the least.
As far as a potential option trade, I’m looking at the JPM May 60 calls (JPM160520C00060000, $0.83, up $0.05) as a possible way to play a surge past $60 in the stock. These options traded nearly 3,000 contracts on Friday, but I wanted to do some homework before possibly getting us into a trade.
I might consider going long the aforementioned call options if they stay under $1 over the next day or two. However, I also want to watch to see how the overall market responds to last week’s mini pullback before jumping into bullish positions.
There are weekly and longer-term options available to trade on JPM, and there are ways to buy protection to the downside as well with put options. In any event, if I take action, I will send out a Trade Alert.
Wells Fargo is a few bucks away from its recent 52-week low of $44.50, and the low prices had Warren Buffet bottom-fishing. In late March, Berkshire Hathaway reported a 10% passive stake in the company. This is up from the 9.8% holding filed in the annual report in February.
Despite the bullish bets being made by Buffet, analysts have trumped the stock with downgrades in recent weeks. UBS issued a “Sell” rating on the stock in late March, while another brokerage firm downgraded shares from “Buy” to “Neutral.”
The WFC May 47 calls (WFC160520C00047000, $1.30, up $0.12) and the WFC May 47 puts (WFC160520P00047000, $1.50, down $0.15) could be used as a “straddle” option trade to play a price move of more than $3. If achieved, the trade would make a profit on a move above $50 or a drop below $44. At current levels, the aforementioned straddle is pricing in a possible 5% move in the stock.
The Dow Jones Transportation Average ($TRAN, 7,736, up 83) got a lot of headlines as the talking heads started noticing the pullback throughout last week. The problem is that they also failed to notice the rally off of the January lows, which was one of the main reasons the market started rebounding in mid-February.
I have been highlighting the transports on nearly a weekly basis, and I mentioned that a run past 8,000 was likely coming. This level tried to hold throughout March, but the recent close below the 200-day moving average has caused some concern. There is wiggle room to 7,600, followed by 7,500-7,475 and the 50- and 100-day moving averages. Both are in bullish uptrends are in the process of forming a mini “golden cross.”
I often mention that I keep an active watch list of about 25 stocks to play options on, but I also monitor a few hundred stocks on a daily basis. One of the easiest ways to play a market pullback, selloff or correction is to buy index put options. This means you are rooting for the market to go down.
The talking heads are panicking, and everybody seems to be pulling money out of the market ahead of first-quarter earnings. It seems that they are afraid and don’t know how to make money to the downside. I don’t think we are at that point yet where we need to be loading up on put options, but, when that time comes, we will be ready.
Let’s wait for this week to play out to see if a continued trading range with lower lows is in store or if April does prove to be historically strong for the Dow.
From desk to press, futures look like this: Dow (+58); S&P 500 (+7); Nasdaq 100 (+19); Russell (+6).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 38-6 (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.
Merck (MRK, $55.36, down $0.06)
MRK May 57.50 calls (MRK160520C00057500, $0.48, down $0.13)
Entry Price: $0.33 (4/5/2016)
Exit Target: $1.00 (Limit Order on first half)
Stop Target: $0.45 (Stop Limit)
Action: The Stop Limit at $0.45 triggered late in Friday’s session following the dip to $55.10, and we are now out of the trade.
Although I’m slightly disappointed that we were scalped out of the trade, I will keep MRK on my watch list for a possible re-entry point.
Inovio Pharmaceuticals (INO, $9.21, down $0.13)
INO May 10 calls (INO160520C00010000, $0.70, flat)
Entry Price: $0.55 (4/6/2016)
Exit Target: $1.10
Stop Target: $0.57 (Stop Limit)
Action: Set a Stop Limit at $0.57.
Support is at $9-$8.75. Resistance is at $9.75-$10. The technical setup still looks bullish following the recent “golden cross” that formed earlier this month.
You can read my extended write-up on INO in the April 4 Pre-Market Update.
Hertz Global Holdings (HTZ, $9.70, up $0.25)
HTZ May 11 calls (HTZ160520C00011000, $0.33, up $0.01)
Entry Price: $0.60 (4/1/2016)
Exit Target: $1.20
Stop Target: None
Action: Support is at $9.50-$9.25 and the 50-day moving average. Resistance is at $10-$10.25.
You can read my extended write-up on HTZ in the April 4 Pre-Market Update.
Oracle (ORCL, $40.36, up $0.39)
ORCL May 42 calls (ORCL160520C00042000, $0.27, up $0.02)
Entry Price: $0.55 (3/29/2016)
Exit Target: $1.10
Stop Target: None
Action: Support is at $40-$39.50. A close below the latter would be a bearish development that would likely force us out of the trade. Resistance is at $41-$41.25. The “golden cross” that formed earlier this month keeps me bullish on the trade, but shares need to clear $41.50 this week to get their momentum back.
Editor and Chief Options Strategist