In This Issue:

Dear Momentum Options Subscriber,

The bulls were looking strong throughout April, but the historical end-of-month weakness helped the bears earn a slice of the pie. The bullish momentum has clearly been lost, and many of the suits-and-ties are now saying that they “predicted” the pullback.

The problem with that is that those are the same knuckleheads that missed the 20% rally off of the mid-February lows. Of course, we have been well prepared for a possible bearish environment since identifying the previous trading range and watching volatility over the past few weeks.

The Dow fell 57 points, or 0.3%, to finish at 17,773 on Friday. The blue-chips stayed in the red for the second-straight session after trading to 17,651. Support at 17,600 held on the break below 17,800. There is risk to 17,450-17,400 and the 50-day moving average if 17,600 fails this week. Upper resistance is at 17,900-18,000.

 

The S&P 500 slipped 10 points, or 0.5%, to close at 2,065. The index tested a low of 2,052 intraday, and I mentioned that there was risk to 2,050 if 2,070 failed to hold. There is additional risk to 2,035-2,030 and the 50-day moving average if 2,050 is breached. Resistance has been lowered to 2,080-2,085.

 

The Nasdaq dropped nearly 30 points, or 0.6%, to end at 4,775. Tech traded into positive territory shortly after the open before tumbling to a low of 4,740. I warned of trouble to 4,750-4,700 and the 100-day moving average if the bears cracked 4,800. The close below the 50-day moving average was also bearish, with resistance now at 4,825-4,850 and the 200-day moving average.

 

The Russell 2000 stumbled 9 points, or 0.8%, to settle at 1,130. The small-caps saw no signs of green and fell to a low of 1,124 late in the day. Backup support at 1,125-1,120 and the 200-day moving average held, but there is risk to 1,110-1,100 on a move below the latter. Resistance is at 1,140-1,145. The bulls will need to clear 1,150 this week to regain their lost momentum before I would say the overall market is “safe” again.

 

The S&P 500 Volatility Index ($VIX, 15.70, up 0.48) gained 3% after soaring to 17.09 during the second half of Friday’s action. The bulls held 17.50 and the 50-day moving average, but there is risk to 19-20 and the 100- and 200-day moving averages if these levels fail to hold.

 

Ahead of this morning’s open, Wall Street will either be thinking it’s time to “sell in May and go away” or that “April showers bring May flowers.” The market was looking rosy in April up until last week’s action. Although the bulls did well and won three out of four on the major indices, the bears did some serious technical damage.

The Dow gained 88 points last month and is up 348 points, or roughly 2%, for 2016. The 50-day moving average is still in a bullish uptrend, but the 100-day moving average is leveling out. However, the 200-day moving average appears to be rolling over after flat-lining for the past six weeks. The blue-chips have closed higher for three-straight months, which is something that did not occur in 2015. This is a slightly bullish signal.

The S&P 500 added 5 points, or 0.3%, in April and is higher by 21 points, or 1.5%, year to date. The 50-day moving average is also in a bullish uptrend, with leveling 100- and 200-day moving averages over the past month. The index has posted wins for two-straight months following two months of losses to start the year. This is a somewhat neutral signal.

The Nasdaq dropped 94 points, or 1.9%, for April and is down 232 points, or 4.2%, through its first four months. Friday’s action held the 100-day moving average, but the 50-day moving average appears to be flattening out. The 200-day moving average also appears to be breaking lower. Tech has traded lower in three of four months thus far in 2016, and it feels like the index is in a bearish environment going into this week.

The small-caps advanced nearly 17 points, or 1.5%, last month, but they are lower by 5 points, or 0.2%, for the year. The 50-day moving average is still in a rising uptrend, and it cleared the 100-day moving average late last month to form a mini “golden cross.” The 200-day moving average is in a downtrend, but it held on Friday’s pullback.

An official golden cross could form if the 50-day moving average and the 200-day moving average intersect, but a close below 1,120-1,115 could negate this setup. This would be a bullish development if all goes well. The Russell 2000 has closed higher during the past two months, but it’s unclear how May will play out until we get a few more clues.

The VIX finished above 15 last Thursday following a string of 12-straight closes below this level. The back-to-back bearish moves have seen higher highs and higher lows being made. However, the bulls are currently holding the 50-day moving average, along with backup support at 17-17.50.

I mentioned throughout April that it would be imperative for the bulls to clear and hold the 13.50-12.50 levels for fresh all-time highs to be achieved. At current levels, it’s highly unlikely the VIX will take out three levels of support at 15 and 13.50-12.50 in May. However, the bears could score a hat trick if they clear and hold upper resistance at 17-17.50 and 20.

A move above the latter could lead to a possible iPath S&P 500 VIX Futures ETN (VXX) trade like the one I discussed in last Tuesday’s Mid-Market Update.

I covered the technical setup for the trade, but the overall picture shows both good and bad signs. Fundamentally, good stocks that were oversold in January rebounded over the past two months off of the mid-February lows before entering the recent trading range.

While support levels were stretched last week, I see a number of possible setups in the charts going forward, but there is one that I don’t see at this time. First, what I don’t see is a rebound in the major indices to test higher highs over the next two weeks.

I haven’t done the “detailed” chart work since my Feb. 29 Pre-Market Update, but I will be performing my next analysis sometime in late May or early June. If you are a new subscriber, or even if you are a longer-term subscriber, please read and review the charts in the link above to get an idea of my overall framework for 2016.

For those of you that want the quick update, I talked previously about a possible rebound in the Nasdaq peaking at 5,000-5,250. In fact, with the Nasdaq just below 4,600 on the last trading day of February, I said that any upside rally might be limited to the aforementioned levels. Here is the Nasdaq chart from the Feb. 26 close, along with my thoughts:

 

The high on the Nasdaq reached a peak of 4,969 last month, and there has been nearly a 200-point drop, or 5%, since. The lower range of my upside target came within 31 points, which was close enough for me to turn and remain slightly cautious on tech.

I now see two possible trading patterns developing over the next few weeks, and possibly a more serious one that may have already developed.

The more serious technical patterns show possible “symmetrical triangles” forming, and these were evident in December. Here is the chart of the Nasdaq from the Dec. 31 close depicting what they look like. I showed this chart again in the Feb. 16 Pre-Market Update:

 

Coming into January, the symmetrical triangles were the biggest clues that the month was going to be nasty. I had already been talking about a failed “Santa rally,” and we did very well playing the massive pullback into mid-February.

With the suits-and-ties still talking their books coming into 2016, it took guts to go “short,” but we did. It also took courage to open bullish positions in February when the market was selling off and tapping fresh lows. I would say we did rather well with those positions also.

The portfolio has registered a win rate above 80%, and my goal is to keep it that way while improving these numbers for the rest of 2016. The point is that it is extremely hard to trade volatility and trading ranges. To navigate the waters this well has been a blessing, although it has taken a lot of hard work.

I’m not sure if the current symmetrical triangle formations will lead to continued selling pressure to start the week, but, if they do, I have plenty of bearish trades on my watch list.

However, there are two other possible outcomes as well. A short-term trading range could develop and last a week or two. While there could be some upside bullishness, if new resistance levels hold, the trading range would complete a “right shoulder.”

The longer-term technical setup, if another trading range resumes for a few weeks, would be a “head-and-shoulders” pattern. The right shoulder forms starting with a pullback, followed by a peak that is lower than the head. Once complete, traders watch for the break of the right-shoulder lows for the possible start of a major selloff.

I also believe that the recent divergence between the broader market and tech has confused many traders. Other indicators I follow gave us clues that a possible market top would be in, and that “might” have occurred last Thursday.

Any significant rebound and hold this week could lead to a little choppiness to start May before the bears gain full control of the wheel. I expect a very busy week for possibly opening New Trades, although Friday’s environment could have been a head-fake.

I don’t like opening New Trades ahead of a weekend unless I have a clear sense of market direction. If there is a major selloff coming, we haven’t missed anything. If a trading range develops, we will stay flat and wait for the action to come to us.

From desk to press, futures look like this: Dow (+38); S&P 500 (+5); Nasdaq 100 (+9); Russell (+4).

Momentum Options Play List

Closed Momentum Options Trades for 2016: 43-9 (83%). 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.

 

Wal-Mart Stores (WMT, $66.87, down $2.04)

WMT May 65 puts (WMT160520P00065000, $0.93, up $0.56)

Entry Price: $0.73 (4/12/2016)

Exit Target: $1.50, raise to $2.00 (Limit Order on first half)

Return: 27%

Stop Target: $0.25, raise to $0.75 (Stop Limit)

Action: Raise the Exit Target from $1.50 to $2.00 (Limit Order on first half). Also, raise the Stop Limit for the entire trade from $0.25 to $0.75 to protect profits.

We previously had a Stop Limit only on the first half of the trade.

This position made a tremendous recovery last week following the run towards $70 last month. Shares traded down to $66.36 on Friday, and the close below the 50-day moving average was slightly bearish.

The 50- and 100-day moving averages are still in solid uptrends, however, which is why I also raised the Stop Limit.

Support is at $66-$65. Resistance is at $67-$67.50-$68.

 

Bank of America (BAC, $14.56, down $0.23)

BAC June 15 calls (BAC160617C00015000, $0.36, down $0.10)

Entry Price: $0.58 (4/28/2016)

Exit Target: $1.20

Return: -38%

Stop Target: None

Action: Short-term support is at $14.25-$14 and the 100-day moving average. Resistance is at $14.75-$15.

 

Whole Foods Market (WFM, $29.08, down $0.71)

WFM May 33 calls (WFM160520C00033000, $0.23, down $0.14)

Entry Price: $0.48 (4/18/2016)

Exit Target: $0.75-$1.00

Return: -52%

Stop Target: $0.15 (Stop Limit)

Action: Support is at $29-$28.75. Resistance is at $30.50-$31. The company is scheduled to announce earnings after Wednesday’s close. I will have a preview of the numbers this afternoon. The technical setup looks bearish, and the 50-day moving average is now declining. There is a chance that our Stop Limit will trigger today on further weakness in the stock.

 

Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options